Nathan v Federal Commissioner of Taxation

This case concerned an appeal by Albert Henry Nathan to the Supreme Court of New South Wales against an income tax assessment made by the Federal Commissioner of Taxation. The dispute centred on whether dividends received by Mr. Nathan in England from English-incorporated companies, which derived profits from business operations both within and outside Australia, were taxable in Australia. Pring J. of the Supreme Court of New South Wales stated a case for the opinion of the High Court of Australia.

The legal issues before the High Court were: (1) whether dividends received by a shareholder in England from companies incorporated and controlled in England, but which earned profits in Australia, constituted income derived from a source within Australia for the purposes of the Income Tax Assessment Act 1915-1916; and (2) whether the place of incorporation, registered office, central management, and control of a company, or the place where dividends are declared and paid, determined the source of the dividend income for tax purposes, or if the location of the company's profit-generating activities was the determining factor.

The High Court, in a joint judgment delivered by Isaacs J., held that the dividends were derived from a source within Australia and were therefore taxable. The Court reasoned that the Income Tax Assessment Act 1915-1916, particularly section 10, required income tax to be levied on taxable income derived directly or indirectly from sources within Australia. The Court interpreted "source" not as a legal concept but as a practical matter of fact, referring to the locality where the business producing the income was carried on. The amendments to section 14(b) of the Act were seen as a legislative declaration that dividends were taxable to the extent that the company's profits were derived from Australian sources, regardless of the company's place of incorporation or the place where dividends were declared and paid. The Court rejected the argument that the shareholder's "share" in the company, or the place of dividend declaration, constituted the sole source of the dividend income, finding that the substance of the matter was the underlying profits generated by the company's operations.

The High Court remitted the case to the Supreme Court of New South Wales with the opinion that the sums in question were rightly included in the assessment.