MacFarlane v Commissioner of Taxation

Re: MATTHEW MacFARLANE
And: COMMISSIONER OF TAXATION
No. G19 of 1985
Income Tax and Estoppel

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Fisher J.
Beaumont J.
Burchett J.

CATCHWORDS

Income Tax - taxpayer omitted from his return interest on certain investments - whether his de facto wife beneficially entitled to half of investment income - whether legal title determinative - taxpayer also failed to disclose certain moneys appropriated by him from company he controlled - whether money appropriated "deemed dividend" for purposes of s.108 of Income Tax Assessment Act 1936 - whether "dividend" part of his assessable income pursuant to s.44(1) of the Act - whether the "dividend" paid "out of profits derived by (the company)".

Estoppel - whether taxpayer estopped from raising beneficial entitlement of his de facto wife - whether Commissioner suffered detriment - effect of s.170(2)(a) of Act.

Words and Phrases - "out of profits" (s.44(1) of the Act).

Income Tax Assessment Act 1936 ss.44(1), 108, 170.

Acts Interpretation Act 1901 s.15AB(1)

Cases on the beneficial entitlement of a third party -

Calverley v. Green (1984) 56 ALR 483

Muschinski v. Dodds (1985) 62 ALR 429

Last v. Rosenfeld (1972) 2 NSWLR 923

Stewart Dawson and Company (Victoria) Proprietary Limited v. Federal Commissioner of Taxation (1933) 48 CLR 683

The Countess of Bective v. Federal Commissioner of Taxation (1932) 47 CLR 417

Cases on estoppel -

Con-Stan Industries of Australia Pty. Ltd. v. Norwich Winterthur Insurance (Aust.) Ltd. (1986) 60 ALJR 294

Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105

Commissioners of Inland Revunue v. Brooks (1915) AC 478

Maritime Electric Co. Ltd. v. General Dairies Ltd. (1937) AC 610

North West County District Council v. J.I. Case (Australia) Pty. Ltd. (1974) 2 NSWLR 511

Denver Chemical Manufacturing Co. v. Commissioner of Taxation (N.S.W.) (1949) 79 CLR 296

Cases on the application of ss.44(1), s.108 -

Federal Commissioner of Taxation v. Comber (1986) 64 ALR 451

Federal Commissioner of Taxation v. Blakely (1951) 82 CLR 388

Commissioner of Taxation v. Slater Holdings Ltd. (1984) 56 ALR 306

Walker v. Wimborne (1976) 137 CLR 1

Australasian Scale Co. Ltd. v. Deputy Commissioner of Taxation (Qld.) (1935) 53 CLR 534

Rutherford v. Federal Commissioner of Taxation (1976) 6 ATR 542

Marra Developments Ltd. v. Rofe (1977) 2 NSWLR 616

Cooper Brookes (Wollongong) Proprietary Limited v. Commissioner of Taxation (1981) 147 CLR 297

Commonwealth of Australia v. O'Reilly (1984) 52 ALR 631

Federal Commissioner of Taxation v. Uther (1965) 112 CLR 630

Gibb v. Federal Commissioner of Taxation (1966) 118 CLR 628

Peter Buchanan Ld. and Macharg v. McVey (1955) AC (note) 516

Partridge v. Mallandaine 2 TC 179

Minister of Finance v. Smith (1927) AC 193

Mann v. Nash (1932) 1 KB 752

Southern v. A.B. (1933) 1 KB 713

Lindsay, Woodward and Hiscox v. The Commissioners of Inland Revenue (1932) 18 TC 43

HEARING

SYDNEY

#DATE 8:8:1986

Counsel and Solicitors for Appellant: Mr. D.G. Hill Q.C. Mr. R. Edmonds instructed by J.W. Walker & D.K.L. Raphael

Counsel and Solicitors for Respondent: Mr. D.M. Bloom instructed by the Australian Government Solicitor

ORDER

The appeal be allowed in part.

The orders made by the Supreme Court of New South Wales be varied by ordering that -

(a) The amended assessments for the years of income ended 30 June 1972 to 30 June 1979 inclusive be remitted to the respondent so that they may be further amended by including in the assessable income of the appellant one half only of the income derived from the investments made in the name of the appellant;

(b) there be no order as to costs in that Court.

The appeal otherwise be dismissed.

There be no order as to the costs of the appeal.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

In this matter I have had the advantage of perusing in draft form the reasons of Beaumont J. for allowing the taxpayer's appeal on the first issue, namely the assessment against him of the whole of the income from certain investments. I agree with his conclusion and his reasons therefor. However in my opinion it would have been open to the appellant to have contended, successfully on the evidence accepted by the trial judge, that he and Miss Masterman carried on in partnership the service station business, to the profits and invested profits of which they were jointly entitled. The fact that the assets of the business and the invested profits thereof were nominally vested in the appellant was immaterial, there being no dispute between the partners. In these circumstances it was strictly unnecessary to determine whether the appellant held the same as express, constructive or resulting trustee thereof and the consequence of such a determination as against the Commissioner. However the matter was not argued on this footing either before the trial judge or this Court.

The second aspect in which the appellant objected to the amended assessment arose out of the decision of the Commissioner to include in the appellant's assessable income certain amounts which he deemed to be dividends by virtue of the provisions of s.108 of the Act. These amounts were in respect of the three years of income ended 30 June 1977, 1978 and 1979 respectively and comprised $19,962 for the first year, $21,019 for the second year and $5,716 for the last of these years. Having deemed these amounts to be dividends under s.108 the Commissioner included them as assessable income of the appellant under sub.s.44(1) of the Act.
The facts as found by the trial judge on this aspect of the appeal were as follows. In August 1976 the appellant and Miss Masterman acquired an "off-the-shelf company" which company thereafter conducted the service station business under the name "Matthew MacFarlane Pty. Limited". The company had four issued shares, three held by the appellant and one by Miss Masterman. The appellant had the only two voting shares. At one stage it was contended that he had no right to participate in distributions of dividends but this contention was not pressed when it was ascertained he included a dividend from the company in his income tax return. The company continued to conduct the business in the same manner as earlier carried on by the appellant and Miss Masterman, continuing in particular certain fraudulent practices in which they had earlier engaged. The principal fraudulent activity was to claim that the business had employees who did not exist, thereby enabling the appellant and subsequently the company to claim higher overheads and evade tax. The trial judge found that Miss Masterman was a party to these frauds and both the appellant and Miss Masterman were directors of the company. This particular fraudulent activity also enabled the appellant and Miss Masterman, and subsequently the company, to reduce improperly the rent payable to the Shell Oil Company. The appellant also breached his contract with the latter company by purchasing "black petrol" from strike-breaking truck drivers during periods of strikes. The proceeds of sale of this petrol were not included in the appellant's assessable income as returned, nor subsequently in that of the company. He subsequently agreed that his assessable income as returned for the year ended 30 June 1976 should be increased by $5,000, that of the company by $10,000 for each of the years ended 30 June 1977 and 1978 and by $5,000 for the year ended 30 June 1979.
The trial judge found that between 1972 and 1979 the appellant claimed deductions for wages totalling approximately $85,000 in respect of non-existent employees. On 27 June 1977 the company set up a superannuation scheme and made payments to this scheme in respect, inter alia, of these non-existent employees. The wages paid to non-existent employees were drawn by cheque on the company's account which cheques were paid into an account in the appellant's name.
In reliance upon the information which he obtained concerning the fictitious employees and the exclusion from the company's assessable income of the proceeds of sale of the "black petrol", the Commissioner amended the accounts of the company included in its income tax returns to take account of the fraudulent deductions and omitted income. The loss as returned in each of the 3 years was in consequence of these amendments converted into a profit and a taxable income was disclosed. The company accepted the consequential amendments to its assessments, paid the tax assessed and the penalties imposed. The amounts paid into the account of the appellant in these three years were then deemed by the Commissioner to be dividends in accordance with the provisions of s.108.
Prior to trial the Commissioner supplied the appellant's solicitors with figures which explained how he adjusted the accounts of the company in each year and the extent to which these adjustments revealed profits out of which it could be argued the deemed dividends were paid. The appellant was prepared to conduct the appeal on the basis of these figures whilst denying that it could correctly be said that the deemed dividends were, in accordance with sub.s.44(1), paid out of profits. The figures were as follows:

1977 1978 1979 ---- ---- ----

Balance brought forward - $ 5,072 $ 5,716

Loss on trading as returned $ 7,763 $ 9,426 $ 8,947

Adjustments for omitted income and deductions for fictitious employees $32,797 $31,089 $10,247

Profit on Trading at balance brought forward $25,034 $26,735 $ 7,016

Section 108 deemed dividends $19,962 $21,019 $ 7,016

------- ------- -------

Balance carried forward $ 5,072 $ 5,716 NIL

The trial judge dismissed the appellant's appeal against the inclusion of the deemed dividends in his assessments, from which dismissal he appealed to this Court.
The relevant sections are s.108 and s.44(1). I also set out s.109 for the purpose of comparison with s.108, as both sections employ the device of a deemed dividend and each appears in Division VII of Part III of the Act. This Division imposes special obligations on private companies. Each section was substantially and, in respect of matters crucial to this appeal, significantly amended in 1952. Sections 108 and 109 in their present form are as follows:

"108. (1.) If amounts are paid or assets distributed by a

private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans or payments, as, in the opinion of the Commissioner, represents distributions of income shall, for the purposes of this Act other than the purposes of Division 11A of Part III. and Division 4 of Part VI., be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made.

(2.) Where the amount or value of an advance, loan or payment is deemed, under the last preceding sub-section, to be a dividend paid by a company to a shareholder, and the company subsequently sets off the whole or a part of a dividend distributed by it in satisfaction in whole or in part of that advance, loan or payment, that dividend shall, to the extent to which it is so set off, be deemed not to be a dividend for any purpose of this Act.

109. So much of a sum paid or credited by a private company

to a person who is or has been a shareholder or director of the company or a relative of a shareholder or director, being, or purporting to be -

(a) remuneration for services rendered by that person; or

(b) an allowance, gratuity or compensation in consequence of the retirement of that person from an office or employment held by him in that company, or upon the termination of any such office or employment,

as exceeds an amount which, in the opinion of the Commissioner, is reasonable, shall not be an allowable deduction and shall, for the purposes of this Act other than the purposes of Division 11A of Part III. and Division 4 of Part VI., be deemed to be a dividend paid by the company on the last day of the year of income of the company in which the sum is paid or credited."

Prior to being amended in 1952 s.108 was in the following form and I add emphasis to the crucial parts thereof.

"108. (1.) If any amounts are advanced or any assets

distributed by a private company to any of its shareholders by way of advances or loans, or any payment is made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of those advances, loans or payment, as in the opinion of the Commissioner, represents distributions of income shall, for all purposes of this Act, be deemed to be dividends paid by the company to those shareholders out of profits derived by it.

(2.) Where the amount of any advance, loan or payment is deemed, under the last preceding sub-section, to be a dividend paid by a company to its shareholders, and in any year subsequent to that in which the dividend is so deemed to be paid, the company sets off any dividend distributed by it in that subsequent year, in satisfaction in whole or in part of the amount of that advance, loan or payment, that dividend shall, to the extent to which it is so set off, be deemed not to be a dividend for any purposes of this Act."

The emphasised portions of s.108 prior to amendment coincided, in referring to "profits derived", with the provisions of sub.s.44(1) in its then and present form, pursuant to which the Commissioner assessed the appellant in this matter. By contrast s.108 in its present form makes no reference to the payment being deemed to be a dividend paid out of profits.

Sub-section 44(1) at all relevant times was as follows:

"44(1). The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D...

(a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source; and,

(b) if he is non-resident - include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia."

This appeal again raises the difficulty of reconciling the terminology of s.108 with that of sub.s.44(1) with respect of a payment deemed to be a dividend under the former section. A like difficulty confronted this Court in Commissioner of Taxation v Comber (1986) 64 ALR 451.

On the appeal to this Court the principal topic of argument was whether in the circumstances of this matter the deemed dividends could be correctly said to have been "paid out of profits" as required by sub.s.44(1). The appellant only faintly disputed that amounts were paid to him for his individual benefit and he did not challenge the opinion of the Commissioner that these amounts represented distributions of income.
The trial judge dismissed the appellant's appeal and the appeal of Miss Masterman also on this aspect of the proceedings before him. His findings were that he was not satisfied that the moneys were not paid out of profits and that there was nothing to show that the monies were paid otherwise than out of profits. In other words, it might be said that he was not satisfied that the appellant had discharged its onus, under the provisions of s.190 of the Act, that in this respect the assessment was excessive. He said that he made this finding notwithstanding the fact that there was no "profit" or "profit fund" disclosed in the company's accounts. He stated that the non-existence of such a fund was inevitable in the light of the fraudulent activities in which the appellant and the company had engaged. On one view of this aspect of the proceedings the matter might be concluded by reference to sub.s.190(b) in that the appellant has not established that the deemed dividends were paid out of capital and not out of profits. In circumstances such as the present it could be impossible for the Commissioner to establish that the deemed dividends were paid out of profits.
In referring to the existence of "profit" or a "profit fund" the trial judge had in mind the dicta of Sheppard J. in Rutherford v Federal Commissioner of Taxation (1976) 76 ATC 4304. In that case Sheppard J. was also dealing with sub.s.44(1) with reference to deemed dividends under s.108. He said at p.4310 in respect of the deemed dividends -

"It is probable that the sums of $19,800 and $5,000 were paid out of the earnings of the companies but it does not follow that they were paid out of profits. The moneys were paid during an income year and not out of any fund which could be regarded as a profit or dividend fund, see Principles of Company Law. H.A.J. Ford (1974) pp.186.7. 4 Modern Law Review 273 et seq."

The trial judge was not prepared to hold that the dividend could only be said to be "paid out of profits" if it was paid from a profit fund or a dividend fund. In my opinion he was correct in refusing to limit the expression to amounts so paid, and in concluding that a wider meaning should be given to the word "profits". The learned author of Palmer's Company Law 22nd Edit. at 794 indicates that the expression "profits" has a meaning different from "divisible profits" and "profits available for dividend". The trial judge adopted the meaning that that author gave to the word "profits", namely that it was essentially a business term, denoting an amount of gain made during a certain period. To the extent that Sheppard J. may have held a contrary view, it is proper to appreciate that the decision of the High Court in Slater Holdings infra had not at the time been delivered nor was the explanatory memorandum subsequently referred to in these reasons before him.
The word "profits" is not defined in the Act nor in any of the Acts relating to companies, a matter which prompted Lindley L.J. to make the following comment in Lee v Neuchatel Asphalte Company (1889) 41 Ch 1 at p.21:

"There is nothing at all in the Acts about how dividends are to be paid, nor how profits are to be reckoned, all that is left, and very judiciously and properly left, to the commercial world."

I would also adopt the dicta of Farwell J. in Bond v Barrow Haematite Steel Company (1902) 1 Ch.353 at p.366 where his Lordship said "There is no single definition of the word 'profits' which will fit all cases."

In my opinion the approach of the trial judge can be supported by reference to the reasoning of the High Court in Federal Commissioner of Taxation v Slater Holdings Limited (1984) 84 ATC 4883 at p.4889. The High Court was hearing an appeal from the Federal Court, and only the reasons for judgment of the latter Court were available to the trial judge in this matter. The appeal to the High Court in Slater Holdings was upheld, the principal judgment being given by the Chief Justice with whose reasons the other members of the Court agreed. One of the questions related to the meaning of the expression 'out of profits" in sub.s.44(1) of the Act. On page 4889 the Chief Justice said:

"It is not always easy to determine what are profits out of which dividends ought to be paid. Although profit, in its ordinary sense, often means the excess of returns over the outlay of capital, Farwell J. said in Bond v Barrow Haematite Steel Company (1902) l Ch.353, at pp.365-366, that the question whether there are profits available for distribution 'is to be answered according to the circumstances of each particular case, the nature of the company, and the evidence of competent witnesses'. In answering the question, a starting point is provided by the well known definition of Fletcher Moulton L.J. in In re Spanish Prospecting Company, Limited (1911) 1 Ch 92 at p 98: '"Profits" implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates.' I agree with the statements in In re Income Tax Acts

(No.2) (1930) VLR 233 at pp 245 and 250, that this dictum of Fletcher Moulton L.J. is not of universal application, and that each case must depend on its own circumstances. However, if the definition of Fletcher Moulton L.J. is taken as a guide, the amount of the gift in the present case contributed to an increase in assets and represented a profit. The other evidence in the present case reinforces that view. The amount paid was declared to be a dividend and that implies that it was paid out of profits."

Prior to the passage cited by the Chief Justice from In re Spanish Prospecting Company Limited supra, Fletcher Moulton L.J. said at page 98 of that case;

"The word 'profits' has in my opinion a well-defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification."

The passage cited by the Chief Justice in Slater's Holdings from the reasons of Fletcher Moulton L.J. set out earlier in these reasons then followed.

The starting point in my opinion is as indicated by the Chief Justice, namely to take the definition of Fletcher Moulton L.J. as a guide and then to consider the circumstances of the particular case. This approach accords with the reasoning of the Full Court of Victoria in In re Income Tax Acts (No.2) (1930) VLR 233 when Irvine C.J. said at p 238 this definition of profits "is in the nature of a conventional rule to be applied when circumstances permit its application".
There are in my opinion a number of indications in the Act which confirm my view that there is no justification for attributing a narrow or accounting meaning to the word "profits". I consider that the circumstances here permit the application of the conventional rule. In the first instance it is pertinent to note that the thrust of sub.s.44(1) is primarily directed to the source of the profits out of which the dividend is paid i.e. a source within or without Australia. There is nothing to indicate that the legislature had in mind designating the nature of these profits i.e. net profits, divisible profits, after tax profits etc. As Kitto J. said in Uther v Federal Commissioner of Taxation (1964-65) 112 CLR 630 at p.639 -

"The criterion for the inclusion of a shareholder's receipts from the company is no longer the 'dividend' character of the receipts, that is to say their income character when considered from the shareholder's point of view; it is the profit character-from the company's point of view-of the source from which distributions should be made."

In Comber v Commissioner of Taxation supra this Court indicated the part which s.108 and s.109 played in ensuring that private companies make sufficient distributions of profits to their shareholders upon which shareholders are assessed to tax at their respective rates of tax. Section 109 achieved this end at least in part by denying the company a deduction from its assessable income of the payments which the Commissioner decreed excessive. Section 108 has no such sanction nor indeed any sanction and achieves nothing in this regard unless the payments to shareholders are assessable in their hands. Undistributed profits tax at the rate of 50% does not always provide sufficient incentive to a company and its shareholders for the company to distribute its profits if they are to be assessed in the hands of its shareholders at rates of tax in excess of 50c in the dollar. It would frequently be in the interests of such shareholders to receive funds from the company by way of advances or loans in lieu thereof. It is quite apparent that this was the mischief which the legislature was aiming at in enacting s.108, as is made clear by the following extracts from the explanatory memorandum to the amending legislation enacted in 1952:

"EXPLANATORY NOTE:-

Subject to drafting amendments, the present sections 108 and 109 are being restated.

These sections apply in cases where profits derived by a private company are made over to shareholders or directors in the guise either of loans or payments ostensibly related to services rendered to the company by the persons concerned. Although disguised, the loans or payments are in substance dividends paid by the company.

The advantages sought to be gained from distributing the profits of a company other than by dividends are that -

(i) in the case of loans, the shareholders will not be regarded as deriving income by virtue of 'borrowing' from the company and will avoid taxation upon the amounts received; and

(ii) in the case of payments ostensibly related to services rendered to the company by the recipient shareholders or directors, the amounts paid will be deducted as expenses incurred by the company in deriving its assessable income. If the amounts so paid are allowed as deductions, the taxable income of the company will be reduced accordingly and the amount of tax to which the company is liable will be reduced. Additionally it is sought to have the amounts taxed as personal exertion income in the case of the recipients whereas were the profits distributed in the proper form of dividends the amounts received by the shareholders or directors would be taxed as property income in their hands and subject to the higher rates of individual taxation that apply to income on property.

In the case of so-called loans to shareholders, section 108-and in the case of payments to shareholders or directors, section 109-gives to the Commissioner of Taxation the power to determine whether the profits derived by a company are in fact being distributed to its shareholders or directors under these headings.

When the Commissioner determines that an amount of profits of the company is being distributed in the manner indicated, that amount is to be deemed to be a dividend paid by the company within the prescribed period in relation to the year of income. The amount will also be treated as a dividend in the hands of shareholders or directors who are concerned for the purposes of assessing those persons individually to income tax."

It is significant to note that sub.s.108(1) deems the dividend to be paid on the last day of the year of income in which the payment is made. At that time it will be possible to know whether the company has made profits during the past year i.e. in the words of the Chief Justice in Slater's Holdings, that there has been an excess of returns over the outlay of capital or an amount of gain achieved during that year. But it is at least unrealistic, if not impossible, to predict at the close of the year in question what amounts out of the profits should be appropriated for provisions such as tax, depreciation etc and what amount set aside for a "profit or dividend fund". So long as the company has made profits it is permissable, though not necessarily prudent, to declare thereout a dividend. Likewise to deem a payment from such profits to be a dividend accords with and does not contravene the principle that dividends cannot be paid out of capital. It follows that there is nothing in sub.s.108(1) which requires that the word "profits" in sub.s.44(1) be so narrowly defined that a deemed dividend is not assessable unless profits are set aside as available for dividends. So long as there are profits, any portions thereof distributed to shareholders are liable to be deemed to be dividends and are assessable as such.
Sub-section 108(2) strongly supports this approach. If a narrow meaning is applied the sub-section provides considerable and doubtless unintended scope for tax avoidance in that it is obviously drafted on the assumption that the deemed dividend under sub.s.(1) will be assessable under sub.s.44(1). On that assumption, sub.s.(2) provides that any dividend distributed in a subsequent year which is set-off in satisfaction of an advance or loan (which has been deemed under sub.s.(1) to be a dividend) is deemed not to be a dividend for any purposes of the Act. The consequence of attaching a narrow meaning to the word "profits" may be that this advance or loan was in fact not paid out of profits narrowly defined (and thus not an assessable deemed dividend) because after making appropriate provisions or insufficient profits were available for distribution or dividends. However when in subsequent years dividends, in the ordinary course assessable, are set-off in satisfaction of the advance or loan, sub.s.108(1) deems the dividends not to be assessable under sub.s.44(1). Such is certainly not an intended result and could be used to render dividends normally assessable under sub.s.44(1) not assessable by virtue of the further deeming provision in sub.s.108(2).
It is my opinion that so long as in the year in which a payment deemed to be a dividend is made, the company is making profits as defined by Fletcher Moulton L.J. then that dividend is assessable under s.44(1) because it will not here be paid out of capital.
Turning to the facts of this case the accounts reveal that after the Commissioner made the necessary adjustments, the company in each year achieved an increase in assets which increase represented a profit. Such is apparent by reference either to adjusted balance sheets or adjusted profit and loss accounts. There was no dispute as to the extent of these profits which I set out in the table earlier in these reasons or that they exceeded in each year the amount of the payments deemed to be dividends. Such profits could well not be considered by accountants or other financial advisors as being all available for distribution to shareholders by way of dividends because of the necessity to make certain provisions. However the company has made payments out of its profits which to the extent the Commissioner deemed these payments to be dividends are in my opinion assessable under sub.s.44(1).
I would dismiss the appeal on this aspect of the case. As each party has been successful on one aspect thereof, I would leave each to pay his own costs of the appeal and make no order in respect thereof.

JUDGE2

The appellant now appeals from the dismissal by the Supreme Court of New South Wales of appeals brought by the appellant upon the disallowance of his objections against amended assessments of income based upon income said to be derived by him during the years ended 30 June 1972, 1973, 1974, 1975, 1976, 1977, 1978 and 1979.

The appellant objected to these assessments in two respects. In the first place, he contended that the respondent erred in assessing, as the income of the appellant, the whole of certain income derived from investments made in his name. The appellant's case was that, notwithstanding that the legal title to the investments and their income was vested in him, he was beneficially entitled to only one-half of the investments and their income. He contended that the remaining one-half share belonged, in equity, to Miss Marie Masterman, his de facto wife. He then argued that, for the purpose of assessment of tax, the Income Tax Assessment Act 1936 (the Act) is concerned only with the beneficial entitlement to income; so that the legal title to that income was immaterial for present purposes.
The relevant facts, as found by the learned judge, were as follows. The appellant and Miss Masterman lived in a de facto relationship from approximately 1966. In about December 1967, after discussing the matter with Miss Masterman, the appellant purchased a service station business conducted on premises leased from the Shell Oil Company. The purchase price was $6,000.00. The appellant and Miss Masterman each contributed $2,000.00. The balance, $2,000.00, was borrowed from Shell. At the time of purchase, it was agreed between the appellant and Miss Masterman that the business would be "between the two of us in the proportions 50/50". However, the assets of the business were held in the name of the appellant. Although his Honour made no specific finding on the point (but see his general finding in respect of the appellant's business dealings referred to below), there was evidence from the appellant and from Miss Masterman that it was Shell's policy to discourage partnerships as lessees. For this reason, the assets of the business were nominally vested in the appellant, notwithstanding the understanding between the appellant and Miss Masterman that the business was to be owned by them in equal shares.
The appellant and Miss Masterman worked together in the business. He did the mechanical work and most of the buying and selling of petrol. She did the accounting, clerical and other paperwork. It appears that Miss Masterman worked the same hours as the appellant in the period in question. He drew from the earnings of the business a weekly "wage" of about $200.00. She drew about $150.00 per week. Although no finding was made by his Honour, it appears that, over a period, the loan from Shell was repaid out of the earnings of the business.
The appellant and Miss Masterman used Miss Masterman's "wage" for their living expenses. The appellant's "wage" was retained. Some of it was banked to the credit of an account in the name of the appellant in the Rural Bank. Periodically, money was transferred from the bank account to the credit of another account in the name of the appellant in the St. George Building Society. Pursuant to authority given by the appellant, Miss Masterman operated both accounts from time to time. On several occasions, funds were drawn out of both accounts and paid over to a firm of solicitors for investment by that firm in the form of advances on first mortgage security. The advances were made in the name of the appellant. Miss Masterman generally carried out the arrangements with the solicitors for the making of these investments.
The various investments generated income in the form of interest as follows:

(i) Year ending 30 June 1972 $870.00

(ii) Year ending 30 June 1973 l,O58.00

(iii) Year ending 30 June 1974 950.00

(iv) Year ending 30 June 1975 1,652.00

(v) Year ending 30 June 1976 3,821.00

(vi) Year ending 30 June 1977 4,524.00

(vii) Year ending 30 June 1978 6,269.00

(viii) Year ending 30 June 1979 8,261.00

However, the appellant's return of income disclosed the following interest only:

(i) Year ending 30 June 1972 $79.00

(ii) Year ending 30 June 1973 79.00

(iii) Year ending 30 June 1974 79.00

(iv) Year ending 30 June 1975 79.00

(v) Year ending 30 June 1976 Nil

(vi) Year ending 30 June 1977 90O.00

(vii) Year ending 30 June 1978 Nil

(viii) Year ending 30 June 1979 8,261.00

The amended assessments, challenged in the Supreme Court, assessed the whole of the actual investment income as the income of the appellant.
The learned judge expressed serious doubts as to the credibility of the appellant and Miss Masterman. He found that they had deceived the respondent and Shell. Despite these reservations, his Honour said that he was prepared to accept their version of their relationship and of their dealings.
Before us, it was urged on behalf of the respondent that we should reject the learned judge's findings of primary fact in this regard. A number of matters were relied upon but, in the ultimate analysis, they were matters which went only to the weight to be attributed to particular evidence of the appellant and Miss Masterman. I do not propose to canvass the specific submissions of the respondent on this aspect of the appeal. It is sufficient to say that it has not been shown that the learned judge erred in any respect on this aspect of the matter. The particular question was essentially one of the credibility of the appellant's version of the events. It was not seriously suggested before us that the findings made were not reasonably open to his Honour.
However, his Honour rejected the appellant's argument that he should be assessed on merely one-half of the income from investments which was subsequently revealed. The learned judge was of the view that, for income tax purposes, regard should be had only to the legal form of the relevant transaction. In his Honour's opinion, since the legal title to the investments and their income was vested in the appellant, the whole of the income was assessable as that of the appellant. His Honour was further of the opinion that, in any event, the appellant was estopped from denying that the whole of the investment income was assessable in his hands.
I turn first to the question whether Miss Masterman was beneficially entitled to one-half of the investment income. His Honour found that the appellant and Miss Masterman expressly agreed that the business generating the earnings represented by the investments was to be beneficially owned by himself and Miss Masterman in equal shares. There was also evidence that, in discussions between them, the appellant and Miss Masterman agreed that the investments were jointly owned in equal shares. In any event, the investments could be traced back to the earnings of the business. Moreover, as has been said, Miss Masterman made an equal contribution to their venture. She injected a cash amount equal to that provided by the appellant. She also matched his contribution to the profits of the business by way of services rendered.
In these circumstances, equity would regard the appellant and Miss Masterman as beneficially entitled in equal shares to the assets and income of their joint venture, including the income from the investments in question. Given the express agreement of the parties, it is appropriate to characterise their relationship as involving an express trust. However, if the appellant sought to raise the possible application to such a trust of the Statute of Frauds (see Conveyancing Act 1919 (N.S.W.), s.23C), equity would declare a resulting or constructive trust in favour of Miss Masterman (see Calverley v. Green (1984) 56 ALR 483; Muschinski v. Dodds (1985) 62 ALR 429; Last v. Rosenfeld (1972) 2 NSWLR 923). The appellant, of course, has never sought to deny the beneficial entitlement of Miss Masterman. Moreover, before us, the respondent disclaimed any reliance upon the Statute of Frauds. It follows, in my view, that since the appellant held the investment income as to a one-half share upon trust for Miss Masterman under an express or, alternatively, resulting or constructive trust, the appellant was beneficially entitled to the remaining one-half share of income only.
In my opinion, the learned Judge erred in holding that, for the purposes of the Act, the legal title to income is determinative. The Act, in my view, takes the taxpayer's income as it finds it - that is to say, subject to the general law in all its aspects. This will pick up the position at law and in equity, modified by any relevant legislation, including the provisions of the Act itself. In Stewart Dawson and Company (Victoria) Proprietary Limited v. Federal Commissioner of Taxation (1933) 48 CLR 683 Dixon J., speaking of the presumption of advancement, said (at pp 691):

"I see no reason why this rule should not apply in revenue matters. If liability for tax depends upon the existence or non-existence of a trust, the occasion seems to demand the application of the rules by which the determination of such questions is governed in Courts of equity."

Dixon J. was there dealing with a question arising under land tax legislation, but his observations are equally applicable to the operation of the Act.
I should add that nothing here turns on the circumstance that, in the events which happened, it was not necessary for Miss Masterman to seek relief from a court of equity with a view to enforcing her rights as beneficiary under a trust. The learned Judge, viewing the case as one of constructive trust only, was much influenced by the fact that equitable relief had not actually been granted or even sought by Miss Masterman. His Honour thought that, unless and until such relief were granted, the respondent, as a "stranger" to the trust, could ignore any equitable interest claimed by Miss Masterman.

With all respect to the learned Judge, I cannot agree. Since equity will regard as done that which ought to be done, the existence of equitable interests does not depend upon the making of a curial order granting equitable relief, even in the case of a constructive trust (see Muschinski v. Dodds, supra, per Deane J. at p 451). The position is a fortiori in the cases of express and resulting trusts, where the kind of relief granted by the court of equity is more uniform than in the case of a constructive trust.
It follows, in my opinion, that, for taxation purposes the income in question should be treated as derived by the appellant and Miss Masterman in equal shares.
It was then contended on behalf of the respondent that the appellant was estopped from asserting Miss Masterman's beneficial entitlement to one-half of the subject income. Although the estoppel was said to be an estoppel by representation, the respondent was unable to point to any relevant representation of fact made by the appellant. His returns and his statements to investigating officers were silent on the topic of any beneficial entitlement which Miss Masterman might or might not have had to the business or to the investments. Of course, even if such a representation had been made, it might have been a representation of law and thus not binding (see Con-Stan Industries of Australia Pty. Ltd. v. Norwich Winterthur Insurance (Aust.) Ltd. (1986) 60 ALJR 294 at p 30O). It is not necessary to pursue the point here.
The respondent submitted that, properly construed, the returns of income lodged by the appellant contained representations that the appellant was the sole owner of the service station business. But nothing in the returns touched upon any distinction which might be drawn between the position at law and the position in equity. In particular, the returns did not make any representation with respect to the questions whether Miss Masterman was beneficially entitled to the income of the business or to income from investments which might be traced back to profits earned by the business. On the contrary, the returns were silent on these matters. It follows that no foundation has been established for an estoppel by representation. No other form of estoppel was suggested.
Even if such a representation had been made, it is at least doubtful whether the doctrine of estoppel could have any application to the operation of the Income Tax Assessment Act (see Federal Commissioner of Taxation v. Wade (1951) 84 CLR 105 at p 117; Commissioners of Inland Revenue v. Brooks (1915) AC 478 at p 493; Maritime Electric Co. Ltd. v. General Dairies Ltd. (1937) AC 610; North West County District Council v. J.I. Case (Australia) Pty. Ltd. (1974) 2 NSWLR 511 at pp 523-4; cf. Note, Fairness, Legitimate Epectations and Estoppel, Lewis, (1986) 49 M.L.R. at pp.251-2).
I would further doubt, in any event, that the respondent could establish the ingredient of detriment required to invoke the doctrine of estoppel. It was submitted that, by relying on the appellant's conduct, the respondent had suffered detriment by his inability, having regard to the time which had elapsed, to issue an assessment to Miss Masterman of her share of the investment income as part of her assessable income. Miss Masterman did not disclose the income in her returns and has not yet been assessed in respect of it. By s.170 of the Act, the respondent's power to amend an assessment subsists for a period of six years from the date the tax became due and payable where the taxpayer has not made a full and true disclosure and there has been an avoidance of tax. This period of six years may have already elapsed. However, where the Commissioner is of the opinion that the avoidance was due to "fraud or evasion", there is no time limit (see s.170(2)(a)). In Denver Chemical Manufacturing Co. v. Commissioner of Taxation (N.S.W.) (1949) 79 CLR 296 at p 313, Dixon J. held that "(an) intention to withold information lest the commissioner should consider the taxpayer liable to a greater extent than the taxpayer is prepared to concede, is conduct which if the result is to avoid tax would justify finding evasion". It is unnecessary for me to form a concluded view on the question, but it would seem that the conduct of Miss Masterman in omitting the subject income from her returns could properly be described as avoidance of tax due to "evasion" for the purposes of s.170(2)(a). It is unlikely, therefore, that the respondent could establish any material detriment, even if his failure to assess Miss Masterman could be laid at the door of the appellant and not simply be attributed to Miss Masterman's own non-disclosure of the income in question.
Since I would uphold the appellant's objection to the assessment of the whole of the investment income as his assessable income, I would propose that the appeal be allowed to this extent. I would order that the amended assessments in question be remitted to the respondent for amendment so that only one-half of that income is assessed.
The other challenge made by the appellant to the amended assessments arose out of the inclusion of the sums of $19,962.00, $21,O19.00 and $5,716.00 in his assessable income as dividends deemed to have been paid to him by Matthew MacFarlane Pty. Limited in the years of income ended 30 June 1977, 1978 and 1979 respectively. In assessing the appellant, the respondent applied the provisions of ss.108 and 44(1)(a) of the Act.
The facts are not in dispute. In August 1976, the appellant and Miss Masterman acquired the share capital of a "shelf company", changed its name to Matthew MacFarlane Pty. Limited (the company) and arranged for it to acquire from them their service station business. The company's issued share capital consisted of four shares of which three shares were held by the appellant and one share by Miss Masterman. The company traded profitably in the years now in question. However, an investigation of the company's affairs carried out by the respondent in 1979 revealed that the returns of income lodged by it in respect of that period were false in a number of respects. In each of these income years the company significantly understated its income. It also made a number of spurious claims for deductions. It is convenient to consider the position in each year separately.
In respect of the year ended 30 June 1977, the company omitted from its return income estimated at $10,000.00. This was the amount received by the company on certain undisclosed cash sales of petroleum less the estimated cost of acquiring that petroleum. The appellant ultimately accepted that this amount, which was derived from a number of cash transactions, had been appropriated by the appellant for his own use, albeit with the acquiescence of Miss Masterman. The company also claimed as a deduction a total amount of $17,592.00 which was said to have been paid to employees as wages. However, in the course of the respondent's inquiries, it emerged that the employees in question were fictitious. The "wages" had, in fact, been paid by the company's cheque into the appellant's bank account from time to time. This amount also was applied by the appellant to his own use, again with the acquiescence of Miss Masterman.
The company further claimed to be allowed a deduction in the sum of $8,250.00 as a contribution said to have been made by it to a superannuation fund established by it for the benefit of its employees. It appears that in June 1977, the company consulted a firm known as Estates Planning Associates in this connection. A fund was established in that month. The company arranged for the issue by the Greater Pacific Insurance Company of an insurance policy to provide benefits for the employees of the company entitled under the superannuation scheme. The deduction of $8,250.00 claimed was made up as follows. On 27 June 1977, the company paid Estates Planning Associates the sum of $250.00. On the same day, it paid the insurance company the sum of $l,103.00 towards the premium payable under the insurance policy. It appears that this part of the premium was attributable to the appellant and Miss Masterman as employees of the company. On 29 June 1977, the company paid a further sum of $6,897.00 to the insurance company being the balance of the premium payable under the policy. However, it seems that this amount was attributable to fictitious employees.
When, in November 1979, the true position was revealed the respondent issued amended assessments to the company and to the appellant. In the case of the company, the deduction claimed for wages paid to fictitious employees was disallowed but credits were given for certain other amounts, including the sum of $6,247.00 being the amount of tax instalment deductions apparently remitted by the appellant on behalf of the company. The net amount disallowed in respect of the fictitious employees was $9,962.00. The claim for a deduction of $8,250.00 paid in respect of the superannuation scheme was also disallowed. Further, there was included in the company's assessable income the sum of $10,000.00 being income derived from sales of petroleum. The total of these amounts, i.e. $19,962.00, was included in the amended assessment issued to the appellant in respect of this year of income pursuant to s.108. According to the respondent's reconciliation of the company's accounts, after the adjustments made by him were taken into account, a profit of $25,O34.00 was available for distribution by the company. This amount was arrived at by accepting the trading loss of $7,763.00 claimed by the company in its return but by writing back the sum of $32,797.00 being the amount of profit revealed as a result of the respondent's investigations but not previously disclosed. The three principal items involved in this calculation were the fictitious wages, the net profit conceded to have been earned on petroleum sales yet not disclosed and the contributions to the superannuation scheme. However, the respondent's calculation of the company profits did not make any allowance for any primary income tax payable by the company on that income. That tax was $ll,273.00 but the respondent contends that it should not be taken into account for present purposes. It is not disputed by the respondent that if the liability for that tax were to be taken into account, there would not be sufficient profits to pay a dividend of $19,962.00.
A similar position emerged in respect of the year ended 30 June 1978. Again, the respondent disallowed deductions claimed by the company in respect of fictitious wages in the sum of $ll,O19.00, after allowing a credit of $5,758.00 for tax instalments remitted. Again, the company failed to disclose petroleum sales in the net sum of $10,000.00. That amount was then assessed as the company's income on the footing that it represented its net earnings on that account. The appellant dealt with these amounts in the same way as in the previous year. Accordingly, in respect of the amounts so appropriated, the appellant was assessed by the respondent pursuant to s.108 in the sum of $21,O19.00.
According to the respondent's reconciliation of the company's profit and loss account for this year, a profit of $26,735.00 was available for distribution as a dividend. This figure was arrived at by adding the amount of the adjustments made as a result of the respondent's investigations ($31,O89.00) and the amount carried forward from the previous year ($5,O72.00) and then deducting the loss on trading claimed in the company's return ($9,426.00). In his reconciliation, the respondent again did not take into account primary income tax payable by the company ($9,687.00), proceeding on the footing that the liability for tax should be disregarded for present purposes but accepting that if it were to be taken into account, there would be insufficient profits to provide a dividend of $21,O19.00. The premium ($2,50O.00) paid by the company under the insurance policy issued in connection with the superannuation scheme was disallowed as a deduction. It does not appear that any apportionment of this amount was attempted in the evidence. Apparently, the premium was attributable to the appellant, Miss Masterman and fictitious employees.
The appellant engaged in similar conduct during the year ended 30 June 1979. When the actual position was discovered, the respondent disallowed the company's claim to deduct fictitious wages in the net sum of $2,847.00 (after crediting tax instalment deductions of $928.00). The amount of $2,847.00, together with the sum of $5,000.00, being the undisclosed net proceeds of petroleum sales, were taken into account in assessing the appellant's income pursuant to s.108. That assessment, in the sum of $5,716.00, was made after taking into account a number of adjustments of no present relevance.
According to the respondent's reconciliation, the company's profit and loss appropriation account for this year should have disclosed a profit of $7,O16.00, arrived at by deducting the amount of trading losses previously returned ($8,947.00) from the total of first, profits carried forward ($5,716.00) and, secondly, adjustments made as a result of the respondent's investigations ($10,247.00). Again, this reconciliation did not take account of primary income tax (now agreed at $258.00). In this year, no claim was made by the company to deduct any payment to the superannuation fund. Out of the profits of $7,O16.00 available for the purposes of a dividend, the sum of $5,716.00 only was treated as a dividend deemed to have been paid to the appellant pursuant to s.108; the balance was deemed to have been a dividend paid to Miss Masterman; no question arises here in respect of the latter dividend.
The respondent's treatment may be summarised as follows:

1977 1978 1979 ---- ---- ---- Balance brought forward - 5072 5716 Loss on trading as shown

in Profit and Loss

Account in return 7763 9426 8947 Adjustments made as result

of investigation 32797 31089 10247 Profits treated as

available for

distribution 25034 26735 7016 S.108 deemed dividends

assessed under

s.44(1)(a) as income

of the appellant 19962 21019 5716 ----- ----- ----- 5072 5716 ----- ----- -----

Section 108 is as follows:

"108.(1) If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans or payments, as, in the opinion of the Commissioner, represents distributions of income shall, for the purposes of this Act other than the purposes of Division 11A of Part III and Division 4 of Part VI, be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made.

(2) Where the amount or value of an advance, loan or payment is deemed, under sub-section

(1), to be a dividend paid by a company to a shareholder, and the company subsequently sets off the whole or a part of a dividend distributed by it in satisfaction in whole or in part of that advance, loan or payment, that dividend shall, to the extent to which it is so set off, be deemed not to be a dividend for any purpose of this Act."

Section 108(1) deems certain payments to be dividends paid by the company. It does not, of itself, deem the payments to be assessable income in the hands of a shareholder. This can only occur if s.44(1) also applies (see Federal Commissioner of Taxation v. Comber (1986) 64 ALR 451 at pp 452, 458 and 462). Section 44(1) provides:

"44.(1) The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D -

(a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source; and

(b) if he is non-resident - include dividends paid to him by the company to the extent to which they are paid out of profits derived by it from sources in Australia."

In making the assessments now attacked, the respondent proceeded as follows: the amounts appropriated by the appellant were treated as amounts paid by the company for his individual benefit; the respondent formed the opinion that those amounts represented distributions of income by the company; they were thus deemed to be dividends by virtue of s.108; the dividends were then treated by the respondent as if they were dividends paid to the appellant as a shareholder of the company out of its profits and assessable as his income by virtue of s.44(1)(a).
The assessments were challenged by the appellant on a number of grounds. In the first place, the appellant contended that the amounts paid to him were not "payments...made by the company...for the individual benefit of (one) of its shareholders" within the meaning of s.108(1). It was contended on behalf of the appellant that the situation should be characterised as an appropriation (perhaps a misappropriation) of the company's property on his part rather than a payment made by the company for his individual benefit, as s.108 requires.
A similar question arose in Federal Commissioner of Taxation v. Blakely (1951) 82 CLR 388. There, in a "de facto" liquidation, the assets of a company were appropriated by its shareholders. Latham C.J., in dissenting on the point, held that such an appropriation was not a distribution by the company and thus, not a "dividend" as then defined in s.6 of the Act. But Fullagar J. (Dixon J. agreeing) held that there was a distribution by the company. (See also the discussion in Federal Commissioner of Taxation v. Slater Holdings Ltd. (1984) 56 ALR 306 per Gibbs C.J. at p 311.)
In my opinion, the reasoning of Fullagar J. is applicable here. The income in question was the property of the company. That income was applied for the benefit of one of the company's shareholders with the acquiescence of the controllers of the company. The application of funds in this way may well have constituted a breach of the directors' fiduciary duties at least so far as the company's creditors were concerned (see Walker v. Wimborne (1976) 137 CLR 1 per Mason J. at p 7). But whether the conduct of the company's directors was liable to be challenged as a misfeasance is a different question. Payments were made by the company out of its funds which were for the individual benefit of one of its shareholders. That is sufficient to satisfy the opening words of s.108(1), whatever significance the conduct of those involved may have in other legal contexts.
Section 108(1) then provides that so much of the amount of the payments in question "as, in the opinion of the Commissioner, represents distributions of income" shall be deemed to be dividends paid by the company. In assessing the appellant, the respondent formed the opinion that the payments now in question did represent distributions of income of the company. Although such an opinion might, in a proper case, be open to review before the Board of Review or the Administrative Appeals Tribunal, it could only be challenged in the Supreme Court if it were formed "capriciously or fancifully or upon irrelevant or inadmissible" grounds (see Australasian Scale Co. Ltd. v. Deputy Commissioner of Taxation (Qld.) (1935) 53 CLR 534 at p 555). The appellant did not suggest that it was not reasonably open to the respondent to conclude that the payments made to the appellant represented distributions of the company's income. The concession implicit in the appellant's approach, was, I think, correctly made. It could not be seriously disputed that the only source of funds available to meet the payments made to the appellant was the earnings derived by the company. It follows that this requirement of s.108(1) was satisfied.
However, since it is only by virtue of the combined operation of both s.108(1) and s.44(1) that a dividend deemed to be paid by s.108(1) becomes assessable income in the hands of the appellant, it was submitted on behalf of the appellant that, in the present case, no dividend was paid "out of profits". It was contended that, even if the payments in question were made out of the company's income or earnings, they were not necessarily made "out of profits" for the purposes of s.44(1)(a). The relevant inquiry, the argument ran, was whether there were profits properly available for distribution as a dividend for the purposes of the companies legislation requiring that dividends may only be paid out of profits. It was argued that there can be no profits available for distribution as a dividend unless first, accounts, formal or informal, have been drawn up in respect of an accounting period,@ secondly, those accounts show a fund of profit; and, thirdly, the directors have formed a view that profits actually exist (see Rutherford v. Federal Commissioner of Taxation (1976) 6 ATR 542; cf. Marra Developments Ltd. v. Rofe (1977) 2 NSWLR 616 at p 628). It was further submitted on behalf of the appellant that, even if appropriate accounts had been drawn up at the relevant date or even if accounts had been reconstructed at a later point of time, the payments would still not be made "out of profits". According to the appellant's argument, once proper provisions were made for contributions to the superannuation fund and for the company's liability to pay primary income tax in respect of its understated income, the payments presently in question were, in fact, payments out of capital: after those items had been taken into account, there were insufficient profits left to satisfy the dividends deemed to have been paid to the applicant.

Before turning to the construction of s.44(1)(a) and the question of its application to the facts of the present case, it is necessary to make some reference to the history of the legislation.
Prior to its amendment in 1952, s.108(1) was as follows:

"108.(1) If any amounts are advanced or any assets distributed by a private company to any of its shareholders by way of advances or loans, or any payment is made by the company on behalf of, or for the individual benefit of any of its shareholders, so much, if any, of those advances, loans or payment, as in the opinion of the Commissioner, represents distributions of income shall, for all purposes of this Act, be deemed to be dividends paid by the company to those shareholders out of profits derived by it." (Emphasis added)

It is true that, as amended, s.108(1) now omits the words "out of profits derived by it" in the description of the dividends deemed to be paid by the company. However, the contemporary material indicates that no substantial alteration to the operation of s.108(1) was intended to flow from the omission of these words. The legislative object in amending s.108 and the related provision, s.109, was stated in the explanatory note which accompanied the bill as follows:

"EXPLANATORY NOTE :-

Subject to drafting amendments, the present sections 108 and 109 are being restated.

These sections apply in cases where profits derived by a private company are made over to shareholders or directors in the guise either of loans or payments ostensibly related to services rendered to the company by the persons concerned. Although disguised, the loans or payments are in substance dividends paid by the company.

The advantages sought to be gained from distributing the profits of a company other than by dividends are that -

(i) in the case of loans, the shareholders will not be regarded as deriving income by virtue of @borrowing' from the company and will avoid taxation upon the amounts received; ...

In the case of so-called loans to shareholders, section 108 - and in the case of payments to shareholders or directors, section 109 - gives to the Commissioner of Taxation the power to determine whether the profits derived by a company are in fact being distributed to its shareholders or directors under these headings.

When the Commissioner determines that an amount of profits of the company is being distributed in the manner indicated, that amount is to be deemed to be a dividend paid by the company within the prescribed period in relation to the year of income. The amount will also be treated as a dividend in the hands of shareholders or directors who are concerned for the purposes of assessing those persons individually to income tax." (Emphasis added)

It thus appears that the object of the legislation was to tax, in the hands of shareholders, payments out of the profits or income of the company made for the benefit of shareholders even if no formal dividend was involved. For this purpose, "profits" and "income" were, apparently, regarded as the same thing: the statute spoke of distributions of "income"; the note referred to distributions of "profits".
It is important to notice that there was no suggestion in the note that informal distributions of the company's income or profits were to be taxed, in shareholders' hands, only if the distribution of income or profits were permissible under the company law. The mischief aimed at by s.108(1) was the avoidance of tax on informal or "de facto" dividends - payments disguised as a different transaction but, in substance, dividends, because the payments in fact made over profits or income of the company. It would be a curious, and surely unintended, result if an attempt to tax an informal or "de facto" dividend could be thwarted because of a failure to comply with the formalities of another area of the law. It could be no answer to the application of s.108(1) that the payment in question did not satisfy the technical demands of company law for the proper payment of a dividend: if the payments in question represented a distribution of the company's "income" (to use the language of the Act) or its "profits" (to use the words of the explanatory note), the relevant requirement of s.108(1) would be satisfied even if, under the companies legislation, there were insufficient profits available lawfully to pay a dividend in that amount.
In the present case, it is not disputed that the payments made to the appellant had their source wholly in the "profits" or "income" of the company. (Cf. Slater, supra, at pp.313-4). The respondent formed the opinion required by s.108(1) that the payments "represented distributions of income". There was no challenge to the correctness of this opinion nor, in my view, could any such challenge have been sustained. It must follow that the provisions of s.108(1) were satisfied in the present case.
There remains the question whether s.44(1)(a) applies so as to tax the payment in the appellant's hands as his assessable income. As has been noted, it was submitted on behalf of the appellant that, because provisions should have been made in the company's accounts for the company's primary income tax and for the superannuation fund liabilities, there were insufficient profits available to pay dividends in the amounts assessed under ss.108 and 44(1)(a). In my opinion, there is no reason, of logic or of experience, to import the technical requirements of the company law in this respect into the operation of s.44(1)(a). As has been said, the existence of an appropriate dividend fund is not a condition precedent to the operation of s.108(1). In my opinion, similar considerations indicate that it was unlikely that such a condition precedent was intended to be read into s.44(1)(a), at least in its application to a notional or "de facto" dividend deemed to have been paid by reason of the application of s.108(1). For this purpose, ss.108 and 44(1)(a) must, I think, be read together. When so read, the relevant inquiry, one ultimately of fact, is whether the informal or "de facto" dividend had its source in profits earned by the company. For this purpose, it is not to the point and is artificial, to complain that if it had been attempted, a formal or "de jure" dividend may have been liable to attack under the company law as a payment out of capital rather than profits.
In my opinion, for the purposes of ss.108(1) and 44(1)(a), the relevant inquiry is directed to the ascertainment of the actual source of the informal payment. If the payment was in fact made out of the profits or income or earnings of the company - and in the present context, these terms have the same meaning - the provisions of s.44(1)(a) are satisfied.
If it were to be accepted, the construction of s.44(1)(a) contended for by the appellant could have a curious operation. According to that construction, the provisions of s.108(1) may well be satisfied in a particular case in that a distribution of the company's income could be deemed to be a dividend, yet the provisions of s.44(1)(a) would be satisfied, and the amount assessed as the income of the shareholder, only if there were sufficient profits to permit the payment of a formal dividend under the company law. Such a construction would defeat the evident legislative purpose in the enactment of s.108(1). It will be recalled that the last paragraph of the explanatory note stated that the determination under s.108(1) that a payment represented a distribution of "profits" (or "income") should have the consequence that the dividend thus deemed to have been paid "will also be treated as a dividend in the hands of shareholders or directors who are concerned for the purposes of assessing those persons individually to income tax". The construction of s.44(1)(a) contended for by the appellant should thus be rejected as defeating the explained object of, and mischief aimed at by, the legislation (see Acts Interpretation Act 1901, s.15AB(1); see also Cooper Brookes (Wollongong) Proprietary Limited v. Commissioner of Taxation (1981) 147 CLR 297 per Mason and Wilson JJ. at p 321).
In Rutherford, supra, it was held that ss.108(1) and 44(1)(a) could not apply unless the payments in question were made out of a fund which could be regarded as a profit or dividend fund. The reasoning was that although the payments were made out of earnings it did not follow that they were paid out of profits for the purposes of s.44(1)(a) (at p.348). However, in my respectful opinion, this reasoning should not now be followed since it appears that no reference was made in that case to the explication of the object of the legislation contained in the explanatory note issued at the time of the amendment of s.108(1). As has been said, it is implicit in that explanation that informal distributions of the "income" or "profits" - that is to say, earnings - of a company were intended to be taxed in the hands of their recipients independently of the existence of an appropriate profit or dividend fund.
The question whether the companies legislation required that a provision should have been made for the company's income tax and for a part at least of the premium paid on the superannuation scheme's insurance policy does not, in my view, arise here. Even if it were unlawful under the company law for the directors of the company to pay a dividend without making a proper provision for these liabilities (see Commonwealth of Australia v. O'Reilly (1984) 52 ALR 631 at p 639), it would not follow that in the present case ss.108 and 44(1)(a) could not apply.
In my opinion, at least in its application to s.108(1) dividends, s.44(1)(a) deems to be assessable income dividends in fact paid out of profits. There is, in my view, no reason to read down s.44(1)(a) so that it can bring to tax only the dividends paid out of those profits which the companies legislation designates as properly available for distribution. In the present case, the actual source of the payments made by the company for the appellant's benefit was the company's trading profits. Once that source was established, the provisions of s.44(1)(a) were satisfied.
I would dismiss the appeal on this issue.
In the circumstances, since each party has been successful on one issue, there should be no order as to costs both in the Supreme Court and on the appeal.

JUDGE3

On the first issue in the appeal I agree, for the reasons which he gives, with the judgment of Beaumont J. I would add only to his citation of Stewart Dawson and Company (Victoria) Proprietary Limited v. Federal Commissioner of Taxation (1933) 48 CLR 683, a reference to Countess of Bective v. Federal Commissioner of Taxation (1932) 47 CLR 417, where Dixon J., on the basis that certain income was received, not beneficially, but in trust, held (at p.424) that it "ought not ... to be included as assessable income of the taxpayer".

The second issue is whether ss 108 and 44(1)(a) operate together, in the circumstances of this case, to sustain the assessment. In order that they should do so, it must have been open to the Commissioner to form the opinion that the amounts paid to the taxpayer (which the trial Judge held were paid "by way of advances or loans") represented distributions of income. But that in itself is not enough. It is necessary also that they should have been paid out of profits derived by the company, in order that they should constitute, pursuant to s.44(1)(a), income in the hands of the taxpayer. A distribution of income of a company is not, by virtue of that fact alone, an amount received as income by its shareholder. Nor, in my opinion, is "income" to be equated with "profits"; there may have been relevant expenditure to outweigh the income and obliterate any profit arising from it.
The decisions of the High Court in Federal Commissioner of Taxation v. Blakely (1951) 82 CLR 388 and Federal Commissioner of Taxation v. Uther (1965) 112 CLR 630, as analysed in the judgment of Gibbs CJ in Federal Commissioner of Taxation v. Slater Holdings Ltd (No 2) (1984) 84 ATC 4883, give to s.44(1)(a) a crucial role. It is, of course, correct that if a payment is a dividend as normally understood, it is a payment out of profits, and would therefore satisfy the section. But, as was pointed out in Gibb v. Federal Commissioner of Taxation (1966) 118 CLR 628 at 635, the definition of "dividend" in s.6 departs from "the ordinary and natural sense of that term", so that the deeming of a payment to be a dividend cannot be simply viewed as foreclosing further inquiry, or as rendering the payment income. In its defined sense "dividend" embraces also capital. The Court in Gibb's case concluded at pp 635-6: "the substantive provisions of the Act dealing with what dividends shall be included in a taxpayer's assessable income of dividends (are) to be found in s.44". See also, per Taylor J, in Uther's case (supra, at p 641), and see Rutherford v. Federal Commissioner of Taxation (1976) 6 ATR 542 at 547-8.
Accordingly, when s. 108 has done its work, and deemed an amount paid to be a dividend paid by the company on the last day of its year of income in which the payment was made, the question remains whether that payment should also be described as a payment to a shareholder "by the company out of profits derived by it from any source". It does not seem to me that the answer to this question depends upon any notion of what would be necessary to establish compliance with the requirements for the payment of a dividend by a company. For ex hypothesi those requirements have not been fulfilled. No dividend was declared. A payment was made, that was not made pursuant to any declaration of a dividend, but has been deemed to be a dividend paid on a particular date, not necessarily the date upon which the payment was actually made. Apart from the fact of payment at some time during the relevant year of income of the company, and apart from the opinion of the Commissioner and the circumstances enabling that opinion to be formed and to have relevance, the payment is given effect as a dividend, not by virtue of anything in fact done, but by the operation of the Act itself, which deems the payment a dividend paid on the last day of the relevant year of income. It therefore seems to me to be pointless to ask whether the company could legally have declared a dividend on that day, or indeed at any other time. I do not think, for example, that it is necessary any particular accounts should have been laid before the company (see Marra Developments Ltd v. B.W. Rofe Pty Ltd (1977) 2 NSWLR 616 at 622). The question posed by s.44(1)(a) in relation to such a deemed dividend is simply whether the payment was in fact made out of profits derived by the company from any source.
However, as the provisions of Company Law applicable to the declaration of dividends in the normal sense require that they be declared out of what have been referred to as "available profits", light may be thrown upon the meaning of the expression "paid out of profits" by a consideration of the company law cases, some of which are discussed by Gibbs CJ in the Slater Holdings Ltd case (supra, at 4888-9). Those cases have exhaustively analysed the meaning of the term "profits" and have distinguished, for the purposes of the valid declaration of a dividend, between the consequences of capital and revenue profits (see Marra Developments Ltd v. B.W. Rofe Pty Ltd (supra). In the Marra Developments Ltd case at page 629, Mahoney JA said:

"Whether a revenue profit has been derived must be determined by reference to a particular period."

He added at 630:

"A dividend may of course be based upon the revenue profits of a then current, or last concluded, period, and this is so, even though the company has previously lost and not replaced its fixed capital."

These concepts seem to me to be applicable to the deemed dividend pursuant to the provisions under consideration. In particular, the reference in s.108 to "the last day of the year of income of the company in which the payment ... is made", though doubtless drafted with an eye primarily to other provisions of Division 7, seems naturally to attract the concept of a profit ascertained by reference to the period referred to. If there were then profits, an event occurring outside the period, which is destructive of the profits, need not require the conclusion that the profits could not have supported a deemed dividend on the last day of the period.
In determining whether and what profits have been derived for a company's year of income, it seems to me inevitable that, in any ordinary case, the taxes payable by the company in the gaining of the profits must be taken into account. There must be "profits in an amount necessary to sustain the dividend (which) are in existence in the company itself at the time of the declaration of the dividend" (per Mason J in Industrial Equity Limited v. Blackburn (1977) 137 CLR 567 at 578). It would be idle to speak of sustenance from that which will be consumed by another, though the other be the Commissioner of Taxation. In Commonwealth of Australia v. O'Reilly (1984) 8 ACLR 804 at 811, Fullagar J said:

"A bona fide assessment of profits involves a bona fide estimate of income taxes."

He cited Collins v. Sedgwick (1917) 1 Ch 179, a decision concerned with United Kingdom excess profit duty. That decision, together with others to like effect, was also cited in the judgment of Kingsmill Moore J, an Irish Judge, in Peter Buchanan Ld. and Macharg v. McVey (1955) AC (note) 516 at 522. The judgment of Kingsmill Moore J was described by Lord Keith of Avonholm in Government of India v. Taylor, (1955) AC 491 at 510 as "this admirable judgment", and it was affirmed on appeal by the Supreme Court of Eire (see (1955) AC at 530-534). One of the issues in the case was the effect of excess profits tax upon a distribution of moneys by a company to its shareholders. At p 521 the learned judge said:

"(T)he power of a company to pay dividends or distribute its property is not unlimited ... It may only distribute what can properly and commercially be regarded as profits".

One may comment that recent experience in Australia emphasizes the impossibility of speaking properly and commercially of a profit, while ignoring its taxability. That is what "bottom-of-the-harbour" schemes were about.
But Kingsmill Moore J explained the position in some detail with reference to excess profits tax which, like tax levied upon the taxable income of a company under the Australian legislation and unlike income tax levied upon dividends in the United Kingdom, was imposed upon a company in respect of profits earned. He said:

"(I)f there had been no excess profits taxation, the appreciation of the stocks would be regarded as unrealized profits, and could have been distributed to shareholders after making provision for repayment of the loan and any outstanding debts. But as matters stood, the very act of realization attracted a revenue liability almost exactly equal to the amount of the profits which would otherwise have been made, for excess profits tax, after some small allowances, was payable at the rate of 100 per cent of the profits made. The profits were, therefore, illusory.

Excess profits tax is imposed on the company and is not, as is income tax, imposed on the dividends distributed and merely deductible by the company at the source as a matter of convenience. It must, therefore - at all events, when once it is assessed - be deducted before it is possible to arrive at the amount which can lawfully be distributed to the shareholders as profits. This was established by a series of cases under the analogous excess profits duty imposed as a result of the 1914-18 war: Collins v. Sedgwick (1917) 1 Ch 179; In re Condran (1917) 1 Ch 639; Patent Castings Syndicate Ld. v. Etherington (1919) 2 Ch 254; Vulcan Motor and Engineering Co.

(1906) Ld. v. Hampson (1921) 3 KB 597. I do not overlook the fact that the assessment of the company did not take place till March 1945, after the distribution had been made, and that an assessed tax does not involve any immediate liability till after the assessment has been made: In re Winget Ld. (1924) 1 Ch

550. But where such an assessment is pending, and the basis of the assessment has been fixed by statute so that it is known within very narrow limits, it is impossible to contend that in computing what are the net profits legitimately available for distribution to shareholders such contingent liability can be ignored. To do so is clearly to defraud the creditors of the company, who will find all its available assets and capital swallowed up by a priority revenue claim. Accordingly, it would appear that the agreement come to between the corporators was an agreement to distribute property otherwise than out of profits and so was to do an act ultra vires the company and was inoperative for that reason."

On appeal, Maguire CJ said (at pp 533-534):

"I consider, however, that the judge was right in holding that the company was bound to have regard to the fact that such an assessment was pending and that it was not then in a position to estimate the amount of profits or assets which could properly be distributed amongst its members. I am, furthermore, in agreement with the trial judge that, from the viewpoint of Scotch law, to do so was not honest. In applying both these tests it is necessary to take notice of the claim of the Scottish Revenue."

In the Irish decision a distribution by a company formed an integral part of a fraudulent plan to defeat an impending liability to tax. Kingsmill Moore J had to consider whether the distribution, admittedly made invalidly in Scotland, could be relied on against the company in liquidation as valid in Eire on an asserted principle that a court does not take notice of the revenue laws of another country; while I, accepting in the present case, that under s.108 the distribution here in question has, for the purposes of the Income Tax Assessment Act, a valid effect as a deemed dividend, have simply to determine whether the payment was made out of profits within the meaning of s.44(1)(a). As in the Irish case, it was not made out of legitimate profits. But where a business is carried on by a company, over a period, in an unlawful manner, whether because it conducts, for example, an illegal casino, or trades in stolen goods, or because its books are systematically falsified to conceal income and fabricate deductible expenses, can its illegitimate profits be the source, for the purposes of s.44(1)(a), of a payment which is deemed to be a dividend?
There is a body of authority which justifies the proposition that the illegal nature of a receipt does not deny its taxability. It has been pointed out that to hold otherwise would be to favour dishonest businesses over honest ones. One hundred years ago, in 1886, in Partridge v. Mallandaine 2 TC 179 at 181 Denman J said:

"But I go the whole length of saying that, in my opinion, if a man were to make a systematic business of receiving stolen goods, and to do nothing else, and he thereby systematically carried on a business and made a profit of 2000 pounds a year, the Income Tax Commissioners would be quite right in assessing him if it were in fact his vocation. There is no limit as to its being a lawful vocation, nor do I think that the fact that it is unlawful can be set up in favour of these persons as against the rights of the revenue to have payment in respect of the profits that are made".

In Minister of Finance v. Smith (1927) AC 193 the advice of the Privy Council, delivered by Viscount Haldane, dealt with the application of a Canadian income tax to the profits of illegal trading in liquor. At p 197 he said:

"Construing the Dominion Act literally, the profits in question, although by the law of the particular Province they are illicit, come within the words employed. Their Lordships can find no valid reason for holding that the words used by the Dominion Parliament were intended to exclude these people, particularly as to do so would be to increase the burden on those throughout Canada whose businesses were lawful... Nor does it seem to their Lordships a natural construction of the Act to read it as permitting persons who come within its terms to defeat taxation by setting up their own wrong."

At p 198 he made it clear that their Lordships "must not be taken to assent to any suggestion ... that Income Tax Acts are necessarily restricted in their application to lawful businesses only."
This decision was cited by Rowlatt J in Mann v. Nash (1932) 1 KB 752 where the profits of an illegal trade, being unlawful gaming, were held taxable. At p 758 Rowlatt J said:

"The revenue authorities, representing the State, are merely looking at an accomplished fact. It is not condoning it, or taking part in it. It merely finds profit made from what appears to be a trade, and the revenue laws say that profits made from a trade are to be taxed."

At p.759 Rowlatt J added that the State in such a case was "merely taxing the individual with reference to certain facts".
In Southern v. A.B. (1933) 1 KB 713 Finlay J held that the profits arising from a wholly illegal business of street betting were assessable to income tax. A more elaborate consideration of the taxability of illegal profits is to be found in the Scottish case Lindsay, Woodward and Hiscox v. The Commissioners of Inland Revenue (1932) 18 TC 43. The case arose out of a partnership entered into in order to export, in breach of the laws both of the United Kingdom and the United States, a quantity of rye whisky from the United Kingdom to the United States. Lord Clyde at p 54 said:

"The nature of the transaction here - apart from the fraudulent breaches of law which were inherent in it - was neither more nor less than the commercial disposal of a quantity of rye whisky".

He distinguished a purely criminal enterprise, such as the resetting of stolen goods, not on the ground that it would not involve profits, but on the ground that it would not constitute a "trade" within the meaning of the relevant Income Tax Act. That distinction is, of course, irrelevant here. Lord Morison at pp 57-8 said:

"It is quite in vain for the person who has realised the profit to prove that he made it by cheating or fraudulent trading, or to attempt to contend that the profit he has earned ought to escape chargeability because he might have been convicted of a breach of the law. During the discussion a question was raised as to whether the profits or gains of a burglar were subject to tax. Obviously not, because burglary is not a trade or business; but if a trader committed a housebreaking and stole his rival's order book and, from its information, was able to increase the profits of his own business, I have no doubt that these profits are subject to tax. It is, in my opinion, absurd to suppose that honest gains are charged to tax and dishonest gains escape. To hold otherwise would involve a plain breach of the rules of the statute, which require the full amount of the profits to be taxed and merely put a premium on dishonest trading. The burglar and the swindler, who carry on a trade or business for profit, are as liable to tax as an honest business man, and, in addition, they get their deserts elsewhere."

It does not seem to have occurred to Lord Morison, or any of the other Judges in the cases I have cited, that the right of persons robbed or defrauded to recovery of their property, or of the proceeds of its disposal, would have any effect on the taxability of the profits in fact received by the offender. Similarly, in Countess of Bective v. Federal Commissioner of Taxation (1932) 47 CLR 417 at 424-6, when Dixon J referred to the possibility that a trustee had "appropriated to her own use" an unexpended surplus of income belonging beneficially to another, he said "that surplus would be taxable as part of her (ie the trustee's own) income", though clearly there would in that event have been a right of full recoupment.
In the light of the statements in these cases, I think it can be safely concluded that "profits" in s.44(1)(a) should be construed as including de facto profits, though arising out of illegality. Furthermore, the existence of a right of recovery in some person, upon discovery and proof of the illegality, does not mean that the profit in fact received was any the less a profit. Though the law-breaker may receive his deserts elsewhere, which may include an order for restitution, he has also had his reward, and it was a profit.
To these principles may be added the principle that, the deemed dividend being related by s.108 to a particular date in an income year, the question whether it was paid out of profits must be answered having regard to the profit position at that time. If the company was then successfully evading tax, there was de facto a profit available, which indeed may have continued to exist as such indefinitely. The matter may be tested by asking whether s.44(1)(a) evinces an intention not to treat as a profit sums which were treated as profits by the company and were, perhaps over a period of many years, in the case of a successful fraud, the subject of disguised dividends apt to be caught by s.108. If under these circumstances the payments would be taxable, the only logical cut-off point, in cases where the fraud is less sustained or sooner discovered, is the date of the deemed dividend, as fixed by the Act. That date is the last day of a year of income; since, in the present case, the fraud was then in existence, and with it the fraudulent profits, out of which the payment had been made, s.44(1)(a) supported the assessment.
For these reasons, I agree with the orders proposed.

[1986] FCA 335

08 AUGUST 1986