Sharp Stevenson and Hare Pty Ltd v Federal Commissioner of Taxation - [1927] HCA 10

39 CLR 158

SHARP, STEVENSON &HARE PRO-

PRIETARY LIMITED

THE FEDERAL COMMISSIONER OF War-time Profits Tax-Assessment-Capital of business----" Trading profits invested

in the business - W ar-time Profits Tax Assessment Act 1917-1918 (No. 33 of 1917-No. 40 of 1918), sec. 17 (1). MELBOURNE,

Agreements had been entered into between the appellant, which was a Feb. 28;

trading company, and four persons, who held substantially the whole of the shares in the appellant, by which each of the four persons was employed by SYDNEY,

the appellant in its business and by which each was to be paid a weekly salary April 11.

and a further sum representing as to two of them one-third each, and as to the other two one-sixth each, of the net profits of the appellant. It was also provided that the shares of the profits were to be payable in such manner and at such times as the directors might direct. From time to time resolutions were passed at the annual meetings of shareholders that the net profits should be placed to the credit of the various shareholders' deposit accounts in terms of the agreements entered into, and that the amounts on deposit should be payable in such manner and at such times as the directors should direct, and until paid or satisfied should carry interest at a certain rate on the daily balance. Deposit accounts in the names of the four persons were kept in the books of the appellant in which from time to time were credited their respective shares of the profits and from time to time payments were made out of the accounts by the authority of the directors, but considerable sums always remained to the credit of those accounts. In respect of its war-time profits tax assessment for the year 1918-1919 the appellant claimed that for the purpose of calculating the pre-war standard of profits of its business a sum representing the total of the amounts standing to the credit of these deposit accounts on 31st December 1917 should be treated as part of the capital of its business.

39 CLR 159

Held, by Isaacs, Higgins and Powers JJ. (Rich and Starke JJ. dissenting), that no part of the sum was accumulated trading profits invested in the business, within the meaning of sec. 17 (1) of the War-time Profits Tax Assess- ment Act 1917-1918, and that therefore the sum should not be treated as part of the capital of the business.

APPEAL from the Federal Commissioner of Taxation.

The appellant, Sharp, Stevenson &Hare Pty. Ltd., was a proprietary company which carried on the business of costume and mantle maker. Its issued capital was £7,002 in 7,002 shares of £1 each, and at the relevant times the shareholders were Samuel Francis Sharp, who held 4,074 shares; Ernest Alan Stevenson, who held 1,463 shares; James Gordon Hare, who held 732 shares Annie Jane Hare, who held 732 shares; and E. G. C. Steele, who held 1 share. The first four shareholders above mentioned were…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

AGLC: Sharp Stevenson and Hare Pty Ltd v Federal Commissioner of Taxation [1927] HCA 10
Case: [1927] HCA 10
Decision Date: 11 April 1927

CaseChat Overview and Summary

The appellant, Sharp, Stevenson & Hare Pty Ltd, appealed to the High Court of Australia against a decision of the Federal Commissioner of Taxation regarding its war-time profits tax assessment for the 1918-1919 financial year. The dispute centred on whether certain sums, totalling £8,973 8s. 8d. as at 31 December 1917, standing to the credit of deposit accounts in the names of four shareholders who were also employees, should be treated as part of the capital of the business for the purpose of calculating the pre-war standard of profits. These sums represented accumulated net profits from previous years, which, by agreement, were credited to the shareholders' deposit accounts and were payable at the discretion of the directors, carrying interest.

The primary legal issue before the High Court was to determine whether these credited amounts constituted "accumulated trading profits invested in the business" within the meaning of section 17(1) of the War-time Profits Tax Assessment Act 1917-1918. The appellant contended that these profits, having been retained within the business and used for its operations, should be considered capital. The Commissioner, however, disallowed this claim, arguing that the nature of the transactions meant the profits were no longer accumulated trading profits invested in the business.

A majority of the High Court (Isaacs, Higgins, and Powers JJ.) held that the sums in question were not accumulated trading profits invested in the business. Their reasoning was that the agreements and subsequent resolutions effectively converted the company's undistributed profits into deposits belonging to the individual shareholders, creating a debtor-creditor relationship. These deposits were payable at the directors' discretion and carried interest, thus losing their character as profits of the company and their potential for further accumulation as profits. The majority found that the profits had been distributed in substance, even if not paid out, and had become loans to the company, rather than capital invested in the business.

Consequently, the appeal was dismissed. The majority found that the profits were not "accumulated trading profits" in the sense required by the Act, as they had been appropriated to satisfy contractual obligations to the shareholders, thereby ceasing to be profits belonging to the company and available for its general purposes. The dissenting judges, Rich and Starke JJ., took the view that the substance of the transactions indicated that the profits remained with the company, were used in the business, and had not been irrevocably detached from the company's ownership, thus fulfilling the criteria for capital under section 17(1).

Orders