Federal Commissioner of Taxation v Adelaide Electric Supply Co Ltd [1950] HCA 38

OF AUSTRALIA. 413

{HIGH COURT OF AUSTRALIA.]

AL COMMISSIONER OF TAXATION APPELLANT ; ;PONDENT, AND

DE ELECTRIC SUPPLY COMPANY

oh} RESPONDENT ;

(Company) Tax—Assessment—Currency—Company incorporated in Great H.C, or A. in, carrying on business in Australia—* Capital employed in any account- 1950.

g period" —" Capital paid up in money or by other valuable consideration, ba a

d over the accounting period" —Computation for purposes of tar— ADELAIDE, expressed in English or Australian currency—Accumulated profits— Sept. 28, 29; me (Company) Tax Assessment Act 1940-1944 (No. 90 of 1940—No. 29 MxLnourne, 1944), s. 24 (1) (a) (b). Oct. 30.

_ The paid up capital of a company incorporated in Great Britain is expressed Tatham CF

in sterling, and in order to apply s. 24 (1) (a) of the War-time (Company) "Webb,

Assessment Act 1940-1944 the expression of the amount of the "capital Tyitesjn4 " of such a company carrying on business in Australia should be

into Australian currency at the rate of exchange existing during

televant accounting period.

Decision of Dizon J.: Adelaide Electric Supply Co. Ltd. v. Federal Commis- ioner of Taxation, (1949) 78 C.L.R. 557, affirmed.

from Dizon J.

de Electric Supply Co. Ltd. appealed from orders made J. on the hearing of appeals against three assessments under the War-time (Company) Tax Assessment Act 1940-1944 ect of the three annual accounting periods of the company 31st August in the years 1941, 1942 and 1943 respectively. company was — in Great Britain but carried on

Al4

H. C. or A.

1950. Ww

FEDERAL Commis- SIONER OF TaxaTION v. ADELAIDE Evectric Surrty Co. Lrv.

HIGH COURT

Since 1931 the value of Australian currency had depreciati the extent that £41 was equal to only El6s. Accordingly | capital of ££3,000,000 was equivalent to £43,750,000. ee In 1935 125,000 bonus shares were issued as fully paid, and 1937 and 1939 there were issues of preference shares totalliy 500,000. In respect of these, a sum of £625,000 was paid Australian money. 7 The War-time (Company) Tax Assessment Act 1940-1944 impo a tax upon company profits in excess of five per cent of the cap employed or deemed to be employed by the company during tl accounting period. By s. 24, the Act prescribes a method calculating the "capital employed", and one element in t! calculation is " the capital paid up in money or by other valu: consideration, averaged over the accounting period". An inerea in the amount of the " capital paid up " involves a correspondi increase in the amount of the " capital employed " and a redueti in the taxable profit. Dizon J. held that the £3,000,000 paid before 1930 should | treated as sterling and should be converted into Australian eurre for the purposes of the Act, but that the £625,000 paid up in 193 1937 and 1939 should be treated as Australian currency. a The Commissioner of Taxation appealed to the Full Cou respect of that part of the order dealing with the £3,000,000 before 1930.

D. B. Ross K.C. (with him C. H. Bright), for the appe Nearly all the money subscribed in England had been tran to Australia for use before any difference in the exchange existed. The company is connected with South Australia its work was done, income earned, books kept, and meetii directors held there. Furthermore, all its directors were in Australia, all dividends were paid in Australian currency, no profits, except dividends and interest, were tra England. The balance-sheet of the company shows the in Australian currency and therefore the assets must expressed in Australian currency. The capital subscribe England should be regarded as Australian when brought Australia. The object of the War-time (Company) Tax Asse Act 1940-1944 was to restrict profits beyond a fixed just as much as to secure revenue. The company should excused from this penal tax because of the merely e circumstances of the exchange rate. The effect would be to differentiation between English and Australian companies, ¢

OF AUSTRALIA.

Commissioner of Taxation (1). The fluctuation in the tate had no effect on the amount of money actually oyed in Australia. Assuming that the paid-up capital is in the balance-sheet in English currency and must be erted notionally into Australian currency, then the adjustment be made to the assets as well as the liabilities side. Alterna- y the difference between the capital expressed as English y and the capital expressed as Australian currency must : regarded as a loss and set off against accumulated profits : al Commissioner of Taxation v. Miller Anderson Ltd. (2). muiaMs J. referred to Warner Bros. First National Pictures Tid. v. Federal Commissioner of Taxation (3).]

£. Barwick K.C. (with him K. L. Ward K.C. and A. K. ), for the respondent. The respondent adopts the reasons J. For the purpose of construing s. 24 of the War-time

pany) Tax Assessment Act 1940-1944, the actual value of the ets of the company is irrelevant. The paid-up capital of the

sh currency. It is not affected by the locus or manner of ent of the company's funds. Section 24 gives no right to the figures appearing in the company's accounts. The iy has not suffered a loss by reason of the exchange rate. e company can re-value its assets only in certain special cases. e commissioner cannot do this. It is a matter for the company.

Cur, adv. vult.

The following written judgments were delivered :— C.J. This is an appeal from an order of Dizon J. ng a question relating to the ascertainment of the paid-up of the Adelaide Electric Supply Company Limited, a com- incorporated in Great Britain, for the purposes of the applica- 1 of the War-time (Company) Tax Assessment Act 1940-1944. Honour has held that the capital of the company, so far as it up before 1928 in English pounds, should, for the purposes e Act, be converted into Australian money at the rate of

(1934) 67 C.L.R. 508. (3) (1945) 72 CLR. 134, at p. 138. 73 C.L.R. 341, at pp. 367, 0, 372, 376.

SIONER OF TAXATION v. ADELAIDE

Oct. 30.

e views of Latham C.J. in Incorporated Interests Pty. Ltd. v. H- ©. ov A. 1950.

H. C. oF A.

1950. a

FrprraL Comis- SIONER OF TAXATION v. ADELAIDE Eecrric Suprty Co. Lrv.

Latham C.J.

=

HIGH COURT [1950.

£A125 for £E100. The commissioner, on the other hand, contends that inasmuch as there was no difference in value between the Australian pound and the English pound at the time when the capital in question was paid up, and inasmuch as all the capital

has been used in Australia in the acquisition of assets for the — purposes of the business of the company, the capital should be —

calculated as existing in Australian money to the amount subscribed.

The War-time (Company) Tax Assessment Act 1940-1944 provides for the imposition of a tax upon the taxable profit derived by a company calculated in the manner prescribed in the Act. The taxable profit is the excess over the percentage standard of profits, The percentage standard of profits is five per cent of the capital employed or deemed to be employed by the company (as defined by the Act) during the accounting period, that is (as was held in Bankers & Traders' Insurance Co. Ltd. v. Federal Commissioner of Taxation (1)) the capital employed or deemed to be employed in Australia. The greater the amount of such capital the greater the allowance made under the percentage standard and therefore the lower the tax: see the Act, ss. 3, 18, 19, 20, 24.

Particulars of the constitution of the company can be ascertained by reference to the case of Adelaide Electric Supply Co. Ltd. vy. Prudential Assurance Co, Ltd. (2). The company is a company incorporated in England and its capital, which is a liability of the company to its shareholders, must at all times be a liability in sterling. Before 1928, £3,000,000 of capital was paid up. This capital was paid up in English money, which, at the time, was of the same value as Australian money. For purposes evidently associated with the incidence of taxation the company transferred the conduct and control of its business from London to Australia, and it was held in the case mentioned that dividends which under the articles of the company as altered were to be paid in Australian money were properly so paid to persons who were registered as holders of stock in the company's registers kept in England. Another amount of £625,000 was paid up as capital in Australian money after 1931, when the English and Australian monetary

systems had become different and independent and the value of —

the Australian pound had depreciated so that £41 was equal only —

to El6s. : see Payne v. Deputy Federal Commissioner of Tazation (3).

As the company was an English company, and as, if it were wound —

up, the payment of any capital to the shareholders would have

(1) (1946) 73 C.L (2) (1934) A.C. 12

. 39. (3) (1936) A.C. 497; 55 C.L.R. 158.

RJ OF AUSTRALIA.

hich, since 1931, have been issued as fully paid to the extent of ave in fact only been paid up to the extent of 16s. This

"capital employed " is for the purposes of the Act to be ned by adding amounts specified in s. 24 (1) and making deductions prescribed by that section. The result of such a calculation is the ascertainment of a completely artificial figure. e first element in the ascertainment of this figure is " the capital id up in money or by other valuable consideration, averaged the accounting period'. The question is whether in relation ie accounting periods in question this capital should be calcu- as £E3,000,000 or as £A3,750,000. I agree with Dizon J. it should be calculated in Australian money.

e capital paid up in money or other valuable consideration s simply the capital, so paid up, whether it is still represented ts or not: Warner Bros. First National Pictures Pty. Ltd. Federal Commissioner of Taxation (1), a case approved in Bankers aders' Insurance Co. Ltd. v. Federal Commissioner of Taxa- (2); and cf. Redbank Meatworks Pty. Ltd. v. Commissioner of (Q.) (3). In determining the capital paid up, therefore, it necessary to make any estimate as to the value of any assets. e capital paid up may have been lost in whole or in part, but fact is immaterial for the purposes of applying s. 24. In the ers & Traders' Insurance Company case (2) it was held that 'capital to which s. 24 referred must be capital actually employed lia, and what might have been thought to be a difficulty g from the fact that the capital need not exist anywhere in

pital used in Australia could be satisfactorily ascertained by lucting the value of assets which were known to be employed

paid up in money or by other valuable consideration. The first lese sums is accumulated profits averaged as stated ; the next erves created out of premiums received on the issue of shares ; is the amount by which certain assets exceed the value assets as appearing in the accounts of the company; and, , in a life-insurance company the excess, if any, of reserves

1945) 72 C.L.R. 134, at p. 138. (3) (1944) 69 C.L.R. 315. (2) (1946) 73 CLR. 39.7

"o LXXXIUT.—27

.made in English money, it appears to be clear that the shares H- ©. or A.

1950. Ww

FeperaL Commis- SIONER OF TAXATION ». ADELAIDE Evecrric Suppiy Co. Lrp.

Latham 0.5,

H.C. or A.

1950. Ww

FrpERaL Commis- SIONER OF TAXATION v ADELAIDE Execrric Surry Co. Lrv.

Latham 0.5.

HIGH COURT (19

for liabilities over the amount ascertained as '' calculated liabili for the purposes of the Income Tax Assessment Act. All other sums obviously must be calculated in Australian m They are to be added to "the capital paid up". They thi must be expressed in figures of the same significance and q1 as those by combination with which they are to produce a tot sum as the result of the addition prescribed by s. 24. From this total sum certain deductions are made which it is unnecessary specify in detail. Certain of them depend upon the amount of depreciation allowed under the Income Tax Assessment Act in respect of certain assets. It is plain that all these moneys mus be calculated in Australian pounds. Accordingly, in order to apply s. 24 it is necessary also to express the " capital paid up Australian pounds with reference to the relevant accounting period. Therefore the amount of £3,000,000 which was paid u in English money before 1928 must, in order to apply s. 24, | represented by its Australian equivalent of £3,750,000. As to moneys subsequently paid up in Australia, the actual amount Australian money paid up is that which is for the purposes of th Act the capital of the company.

The appellant contends upon a further ground of appeal thé if the ££3,000,000 capital of the company is to be treated a converted into £A3,750,000, the balance sheet of the comp should be reconstructed by reducing the value of the assets £750,000 or by charging £4750,000 against reserves. I agree that

Assessment Act, 1940-1944 is calculated upon the basis of th "capital employed " in the relevant " accounting period", s. 24. The tax, the "capital employed" and its ingredients are sarily sums of Australian money. Such capital is the money employed in Australia in gaining or producing the taxable profi 8.3.

Section 24 provides that one of the ingredients of " the ea employed in any accounting period " is to be " the capital pai

OF AUSTRALIA.

period ".

paid-up capital of the respondent company is expressed in 'of English money because the company is incorporated in |. It is necessary that the amount representing the paid- pital which is brought into the computation of the capital d in each of the accounting periods with which the case ed should be an amount of Australian money. The unt must be equivalent in value to the paid-up capital. It that it is right to change the amount at which the paid-up is stated in English money to a sum of Australian money truly represents its value and to use that sum for the purpose ting the " capital employed ".

question which is really in controversy is whether, in order

the amount at which the paid-up capital is stated in the e sheet truly represents for economic and fiscal purposes the of the paid-up capital in Australian money and that is the amount of the paid-up capital under the aspect of an which is included in the " capital employed". Section 24 that the capital employed in each accounting period be It is necessary to ascertain, as one element of that ate amount, the amount of the paid-up capital. The Act no reason for departing from the ordinary meaning of -up capital. This is the actual capital invested by the share- It is correctly represented in the balance sheet as one company's liabilities—a liability to shareholders. I think the argument for the appellant departs from these ideas.

order to bring paid-up capital into the computation of the tal employed in each accounting period, it is necessary to express amount of such capital in Australian money. It follows that he computation of the capital employed in each accounting period d be done in accordance with the Act if the rate of exchange een English and Australian money existing during each ing period were applied.

that the judgment of Dizon J. is right.

Wess J. I have had the advantage of reading the judgments Chief Justice and Kitto J. For the reasons given by their ours I agree that the appeal should be dismissed.

y or by other valuable consideration, averaged over the H- ©. or A.

1950. =

FeprraL Commis- SIONER OF TAXATION v. ADELAIDE Evecrric Suppiy Co. Lrp.

MeTiernan J.

H.C. or A.

1950. Ww

FepreraL Commis- SIONER OF 'TAXATION v. ADELAIDE Execrric Supriy Co, Lr.

HIGH COURT

Futtacar J. In-this case I agree with the judgment of Di J., and there is nothing that I wish to add to what he has In my opinion, this appeal should be dismissed.

respectively. The assessment of the tax is governed by the War-time (Compa

accounting period exceeds the percentage standard. "Ta profit " is defined in 8. 3, and no question as to the amount arises in this case. "The percentage standard" in the case the company is an amount equal to five per centum of the capi

period: ss. 19, 20. 'The capital employed" in any accow period is to be ascertained according to an artificial fo contained in s. 24, subject to any increase that may be under s. 25. The formula requires that certain amounts be a

Of the amounts to be added, the first is " the capital paid up money or by other valuable consideration, averaged over thi accounting period": s. 24 (1) (a). It is upon the meanii

primarily depends. The company was incorporated in England in 1905. Its is capital throughout the accounting periods now in question con

were issued before 1930, when the respective monetary systems England and Australia began to diverge. The remaining 625,0 shares were issued in three stages; in 1935 125,000 bonus shar were issued as fully paid, and in 1937 and 1939 there were i of preference shares totalling 500,000.

In the mutual admissions made by the company and the com missioner for the purposes of the case, it was stated (in pars. 19 20, 36, 37, 53 and 54) that in the relevant accounting pet the paid-up capital of the company was £3,625,000, and that whole of that paid-up capital was paid up in money or valuable consideration. It is not stated in these parag whether the £3,625,000 is expressed in sterling or Aus

LR.) OF AUSTRALIA.

for, as to 916,204 in sterling by persons who subscribed for m in England, and as to the remaining 2,083,796 in Australian mency by persons who subscribed for them in Australia; the 000 bonus shares issued in 1935 represented a capitalization f £4125,000; and in respect of shares issued in 1937 and 1939 was paid by the holders £4500,000 only. e company originally contended that "the capital paid up " hould be regarded, in view of these facts, as amounting to 625,000, the sums paid in Australian currency before 1928 g equivalent to similar sums in sterling; and accordingly it that for war-time (company) tax purposes its capital paid should be treated as £44,531,250, by reason of the fact that uighout the relevant accounting periods ££100 was equivalent £4125, 'The commissioner, on the other hand, made his assessments he footing that the capital paid up was £43,625,000. ivon J., before whom the company's appeal against the assess- s came in the first. instance, held that the £3,000,000 paid up shares issued before 1930 should be treated as sterling and be converted into Australian currency for war-time (com- pany) tax purposes, but that the £625,000 paid up on the shares issued in 1935, 1937 and 1939 should be treated as Australian ency. The commissioner has appealed to the Full Court, contending hat the £3,000,000 should be treated as that amount of Australian currency, and the company has not cross-appealed in respect: of the £625,000, _ The point at issue may be stated as being whether the relevant question to be asked in determining the amount to be added under . 24 (1) (a) is, (1) what is the equivalent in Australian currency the actual moneys which the members of the company paid up their shares from time to time and which remained paid up n the relevant accounting periods ; or (2) what amounts, expressed in Australian currency, should be considered, in the relevant g periods, as the company's paid-up capital. I cannot that there is much room for doubt on the point. The

ney. In fact the 3,000,000 shares issued before 1930 were H- ©. or A.

1950. Ww

FEDERAL Commis- SIONER OF TAXATION v ADELAIDE Exzcrric Suprry Co, Lrp.

Kitto J.

H. C. oF A.

1950. Ww

FeperaL Commis- SIONER OF TAXATION v ADELAIDE Execrric Suppiy Co. Lrp.

Kitto J.

HIGH COURT

accounting period constituted the item ordinarily described the liabilities side of a balance sheet as paid-up capital, excluding, of course, any amounts which were not paid up in money or oe other valuable consideration.

Section 24 (1) (a) has nothing to do with the kind of money or other valuable consideration by means of which payment wa made for the shares; its function is to include in the calculation of the artificial sum designated "capital employed" the average — amount which during the accounting period stood as the company's paid-up capital. This amount, so far as the £3,000,000 is concerned, — was £13,000,000 in respect of each of the accounting periods i question. The shareholders became liable, upon taking up thei shares, to contribute £E3,000,000 as "a fixed sum in British sterling " (Adelaide Electric Supply Co. Ltd. v. Prudential Assurance — Co. Ltd. (1)) and this they did. It matters nothing how they contributed that amount—whether in the form of English money, or in its equivalent in the currency of another country, or in kind. The inescapable fact is that the paid-up capital of the company throughout the relevant accounting periods included £E3,000,000. — This was the view taken by Dizon J. ie

Counsel for the commissioner, however, raised before the Full : Court a new contention, based on the fact that the capital con- tributed by the members of the company before 1930 was all — expended in Australia in the purchase of assets, and otherwise for the purposes of the company's business, and was so expended while the Australian pound was at par with sterling. The argu- ment, as I understand it, amounted to this: if the £13,000,000 : so contributed and expended ought to be converted into £43,750,000 for the purposes of s. 24 (1) (a), the difference, being £A750,000, must be regarded as lost ; in the company's balance sheet there is no recognition of the difference between sterling and Australian currency and therefore no recognition of the loss of the £4750,000 ; and if the capital, stated in the balance sheet at £3,625,000, should be increased by £750,000 so as to state it in Australian currency, then either consequential reductions must be made in the items on the liabilities side or consequential additions must be made— to items on the assets side; and this would result either in a — reduction of the amount to be added for accumulated profits under par. (b) of s. 24 (1) or in an increase of the amount to be deducted under par. (7) of that section. 7

The second alternative may be dismissed at once. Paragraph (0) takes two figures, one to be obtained from the accounts of the

(1) (1934) A.C, 122, at p. 150.

Hi

CLR.) OF AUSTRALIA.

ce with sub-ss. (2), (3) and (4) of the section. Neither figure san be altered to allow for a supposed or actual loss.

In my opinion the first alternative should also be rejected, for e reason that the supposed loss of £4750,000 was not in fact tained. The most that can be said is that that loss would have been sustained if the company's assets had been realized g., in a winding up) while the rate of exchange was £4125 to 100 and had produced only the amount of the values attributed to them in the balance sheet. No doubt the directors might have an actual loss; but if for that purpose they had adjusted the books so as to show accumulated profits as diminished by £4750,000, the result would have been to create a hidden reserve of that mount of accumulated profits to cover the loss if and when it ld oceur. The profits actually accumulated would remain ndiminished. Paragraph (b) of s. 24 (1) is concerned with the 'amount of the accumulated profits, and not with the manner in which they are or might have been treated in the company's books. 'The amount is expressly made to include amounts standing to the credit of the profit and loss account at the commencement of the accounting period, but is not confined to amounts disclosed as : mulated profits in the balance sheet. All profits which in fact have been and remain accumulated must be brought into the calculation ; and the possibility, or even the probability, that n the event of liquidation the proceeds of realization would prove insufficient to provide, after the return in full of the paid-up capital, surplus equal to the amount of the accumulated profits affords 0 justification for denying that, as things stand, the full amount accumulated profits is the amount to be brought into the caleulation of " capital employed " in compliance with par. ().

In my opinion the appeal should be dismissed.

Appeal dismissed. 4 Solicitor for the appellant, K. C. Waugh, Crown Solicitor for the Commonwealth,

Solicitors for the respondent, Moulden & Sons. BE:

Ww

Feperau Commis- SIONER OF Taxation vw ADELAIDE Evecrrre Suprty Co. Lrp.

Kitto J.