Thornett v Federal Commissioner of Taxation

The appellant, Mrs. Thornett, appealed against an assessment of income tax made by the Federal Commissioner of Taxation. The dispute concerned whether a sum of money and investments received by Mrs. Thornett upon the reduction of a company's capital, in which she was a shareholder, constituted assessable income. The case was heard by the Full Court of the High Court of Australia.

The legal issue before the court was whether the amount received by the appellant, exceeding the paid-up capital of her shares, was a "dividend, bonus or profit credited, paid or distributed" to her within the meaning of section 16(b)(i) of the *Income Tax Assessment Act 1922-1929*. The Commissioner contended that this excess amount represented profits distributed to the appellant, while the appellant argued it was a capital receipt arising from the extinguishment of her shareholding.

The court reasoned that the transaction involved a reduction of the company's capital, effected by cancelling shares and paying the holders a sum representing their proportionate share of the company's net assets. This was distinguished from a dividend distribution, which typically involves profits being detached from capital while the shareholder retains their shareholding. The court applied the principle from *Commissioner of Taxation (N.S.W.) v. Stevenson*, which held that distributions made in retirement or extinguishment of shares, rather than as income upon an existing shareholding, were of a capital nature and not assessable income. The court found that the payment to Mrs. Thornett was in replacement of her share interest and not a dividend or profit distributed in respect of a continuing shareholding.

The court answered the question of law in the negative, finding that the sum of £15,573 was not assessable income of the appellant and was therefore improperly included in the amended assessment.