Michell v Federal Commissioner of Taxation

This case concerned an appeal by George Henry Michell to the High Court against an income tax assessment for the year 1923-1924. The dispute arose from the Federal Commissioner of Taxation's method of apportioning income derived from Michell's firm, which bought wool and skins in Australia and sold them overseas, sometimes after processing. The Commissioner applied a departmental order (Income Tax Order 816) to apportion income based on the ratio of f.o.b. costs in Australia to overseas costs.

The legal issues before the court were how to determine the taxable income derived from sources within Australia for a business with operations both in Australia and overseas, and whether the Commissioner's method of apportionment was appropriate. Specifically, the court had to decide if a fixed formula could be applied or if apportionment should depend on the specific facts, business judgment, and the nature of the operations.

Starke J. held that no fixed rule or formula for apportionment was possible, and that such apportionment must be based on business judgment and experience applied to the particular facts, the character of the business, and its mode of operation. He rejected the Commissioner's departmental order as unfair, noting that it did not reflect a true relationship between expenses and profits. Considering that the control and financial arrangements of the business resided in Australia, but the bulk of the operations, including selling and manufacturing, occurred overseas, Starke J. concluded that the income should be apportioned equally between Australia and overseas sources.

The appeal was allowed, and the court ordered that the taxpayer's income from the business be apportioned on the basis that one-half was derived from sources within Australia. The assessment was to be varied accordingly, and the Commissioner was ordered to pay the taxpayer's costs.