W M Kuhnel and Company Limited v Deputy Federal Commissioner of Taxation (SA)

The case of *W M Kuhnel and Company Limited v Deputy Federal Commissioner of Taxation (SA)* concerned appeals by the appellant company against assessments for war-time profits tax for the financial years 1916-1917, 1917-1918, and 1918-1919. The dispute centred on the correct method for calculating the deduction from the company's profits for Commonwealth income tax paid in respect of those profits, as provided by sections 15(4) and 15(5)(c) of the *War-time Profits Tax Assessment Act 1917-1918*. The matter was brought before the High Court of Australia by way of a case stated by the Supreme Court of South Australia.

The primary legal issue before the High Court was to determine the proper method for calculating the deduction for Commonwealth income tax. Specifically, the court had to ascertain how to apply section 15(5)(c) of the *War-time Profits Tax Assessment Act*, which required the deduction of the aggregate of amounts of tax that would have been payable by each shareholder if their share of the company's profits had been their sole Australian income. This involved determining how to treat a shareholder that was a trustee, and how the provisions of the relevant *Income Tax Assessment Acts* applied to such a shareholder, particularly in light of changes to those provisions over the relevant accounting periods.

The High Court, in its judgments, clarified the method for calculating the deduction. For the accounting periods 1916-1917 and 1917-1918, the court held that the income tax payable by a shareholder who was a trustee should be calculated as if the trustee were beneficially entitled to the entire share of profits received in that capacity, and that this amount should be assessed at the rate applicable to a person with that income as their sole Australian income. For the accounting period 1918-1919, the court noted that the *Income Tax Assessment Act* had been amended, and the calculation for a trustee shareholder was to be limited to the amount for which the trustee was separately assessed and liable under the revised section 26(2) of that Act. The court also indicated that the method previously applied by the Commissioner for the first two periods, as described in paragraph 24 of the case, was in accordance with the law then existing. The court explicitly stated that the *Sendall v. Federal Commissioner of Land Tax* decision was not to be followed in relation to the *War-time Profits Tax Assessment Act*.