Warner Brothers First National Pictures Pty Ltd v Federal Commissioner of Taxation [1945] HCA 44

ghva-73 6 4-37

H.C. or A, Taxation—Company—War-time profits—Taxable profits—" Capital employe

1945. Ww SypNey, Now. Dec. 19.

Williams J.

HIGH COURT i

[HIGH COURT OF AUSTRALIA.)

WARNER BROTHERS FIRST NATIONAL se 5 PICTURES PROPRIETARY LIMITED '

AND

THE FEDERAL COMMISSIONER OF TAXA-

TION Rusponpe

"Employed in Australia" —« Accumulated profits" —Subsidiary company Australia—Moneys remitted on loan to parent company in United St America—Interest thereon paid to subsidiary company—War-time (Oo a Tax Assessment Act 1940-1941 (No. 90 of 1940—No. 56 of 1941), 8. 3, 24 (

In order to ascertain the "capital employed " for the purposes of s. the War-time (Company) Tax Assessment Act 1940-1941, the definition of words as appearing in s. 3 of the Act must be read into each of the ad and deductions required to be made by s. 24 (1).

From its accumulated profits a subsidiary company in Australia to its parent company in the United States of America, on loan, a sum averaged over the accounting period, amounted to £146,676. Interest

as part of its assessable income,

Held that the said sum was not "capital employed" within the mea of s, 24 of the War-time (Company) Tax Assessment Act 1940-1941.

Appeat from the Board of Review.

Warner Brothers First National Pictures Pty. Ltd. appealed to tl High Court against a decision by the Board of Review d an objection by the company arising out of its assessment under tl War-time (Company) Tax Assessment Act 1940-1941 for ¥

company tax in respect of its taxable income derived during the ended 30th June 1941. ;

j

72 C.L.R.] OF AUSTRALIA.

13:

Section 24 (1) of the Wartime (Company) Tax Assessment Act H. C. or A.

1940-1941 provides, so far as material, that, subject to s. 25, the capital employed in any accounting period should, for the purposes of the Act, be ascertained by adding :—(a) the capital paid up in money or by other valuable consideration, averaged over the account- ing period ; (6) accumulated profits, averaged over the accounting period, including amounts standing to the credit of the profit and loss account at the commencement of the accounting period but not including any profit of the accounting period; (c) any reserve, averaged over the accounting period, which had been created out of premiums received on the issue of shares ; (¢) the amount by which the value prescribed by sub-s. (2), (3), or (4) of s. 24 as the value of any asset to which that sub-section applied exceeded the value of that asset as appearing in the accounts of the company at the commence- ment of the accounting period or, if no such value appeared in the accounts of the company at the commencement of the accounting period, the amount prescribed by that sub-section ; and deducting therefrom—({i) the amount by which the value of any asset to which sub-s. (2), (3), or (4) applied as appearing in the accounts of the com- pany at the commencement of the accounting period exceeded the value of that asset prescribed by that sub-section; (ii) any capital, averaged over the accounting period, the income (if any) from which was not or would not be taken into account in assessing the income of the accounting period under the Income Tax Assessment Act; and (iii) any capital, averaged over the accounting period, invested in shareholdings in any other company.

The appeal was heard by Williams J. in whose judgment the material facts and other relevant statutory provisions are sufficiently set forth.

Kitto K.C. (with him Leslie), for the appellant. Sugerman K.C. (with him Chambers), for the respondent. Cur. adv. vult.

Wrutams J. delivered the following written judgment :—

This is an appeal from a decision of the Board of Review disallow- ing an objection by the appellant company arising out of its assess- ment for war-time company tax in respect of its taxable income derived during the year ended 30th June 1941. By the War-time (Company) Tax Act 1940, s. 4, a tax is imposed upon the amount by which the taxable profit of any company subject to the Act exceeds

1945. ed

WarNER BrorHers Frest Narionau PicruREs Pry. Lev. v Feperan Commis- SIONER OF Taxation,

Dec. 19.

H.C. or A.

1945. — WarnNER Broruers First NatronaL PICTURES Pry. Lrp. ». Feprerau Commis- SIONER OF TAXATION,

Williams J.

HIGH COURT

the percentage standard. This Act was amended in certain respects jn 1941. The Act which relates to the imposition, assessment, and collection of the tax is the War-time (Company) Tax Assessment Act 1940. This Act was also amended in certain respects in 1941 Section 13 of the Assessment Act is to the same effect as s. 4 of the Tax Act. Section 19 of the Assessment Act provides that percentage standard shall be an amount equal to the statutory percentage of the capital employed or deemed to be employe during the accounting period. Section 20 of the Assessment A 1940 fixed the statutory percentage at eight per cent. The amending Act of 1941 reduced this percentage to five per cent in the case assessments for the financial year beginning on Ist July 1941 a all subsequent years. The percentage in the present case therefore eight per cent. Section 3 of the Assessment Act provid that unless the contrary intention appears " accounting period " "taxable profit" have the meanings therein mentioned, and

Australia or in a Territory of the Commonwealth in gaining producing the taxable profit.

£146,676 employed in the following manner. The appellant com is a subsidiary of Warner Bros. Pictures Inc., a company incorporate in the United States, and this sum represented moneys of the appel

lant company remitted to the United States, and lent by the appellant company to the parent company. During the year ended 30th June 1941 the parent company paid the appellant company int at the rate of one and a half per cent on the debt and this int was returned as part of its assessable income. It was not contend before me, as it was contended before the Board of Review, that sum of £146,676 represented capital employed in Australia in gaininy or producing the taxable profit. But it was contended before me as it was alternatively contended before the Board of Review, that this sum, although it was in fact employed in the United State

was nevertheless accumulated profits required to be taken i nt account in the ascertainment under s. 24 of the Assessment Act of th capital of the appellant company employed in the accounting period. The Board of Review rejected both contentions, and with respect t

72 C.L.R.] OF AUSTRALIA.

the additions and deductions required to be made by the section in H. C. ov A.

order to ascertain the capital employed.

Upon the appeal it was agreed that the evidence before the Board of Review should be tendered and considered to be evidence given on the appeal, and no further evidence was tendered by either party. The sole question for determination on the appeal is whether this sum of £146,676 formed part of the capital employed or deemed to be employed by the appellant company during the accounting period within the meaning of s. 24. In Incorporated Interests Pty. Ltd. v. Federal Commissioner of Taxation (1) it was held that the word "capital" in the Assessment Act refers in general to commercial capital. Section 24 of the Act provides an artificial criterion by which the amount of commercial capital employed in any accounting period is to be ascertained in the first instance, but this amount can be increased in accordance with s. 25 in the circumstances therein mentioned.

In Associated Newspapers Ltd. v. Federal Commissioner of Taxation (2) I referred shortly to the operation of s. 24. In determining the capital employed by a company in any accounting period the respon- dent is bound by the provisions of this section, because it is only a company and not the respondent which can apply under s. 25 for a determination that a greater amount than that ascertained under s. 24 shall be treated as the capital employed for the purposes of the Act. The words " capital employed " occur in ss. 19, 21, 23, 24, and 25 of the Act. Wherever they accur, the definition requires that unless the contrary intention appears they shall mean capital of a company employed in Australia or in a Territory of the Common- wealth. But it is contended on behalf of the appellant company that s. 24 is itself a definition of what is meant by capital employed in Australia or in a Territory of the Commonwealth, and that this section, which is mandatory, requires that this capital shall be determined by the process of additions and deductions therein prescribed and by that process alone so that no other additions or deductions can be taken into account. As s. 24 (1) (e) only applies to life assurance companies it can be disregarded for the purposes of this appeal, so that the additions which must be taken into account are those enumerated in sub-s. (1) (a), (b), (c) and (d). Sub-section (1) (6) provides that one amount to be added is the accumulated profits of a company averaged over the accounting period, including amounts standing to the credit of the profit and loss account at the commence- ment of the accounting period. Admittedly the debt of £146,676 repre-

(1) (1943) 67 C.L.R. 508. (2) (1944) 69 C.L.R. 257, at pp. 261, 262.

1945. Se

WARNER BrorHers First Narionan PrcruRES Pry. Lrp. v Feperau Commis- SIONER OF Taxation.

Williams J.

H.C. of A. 1945, ed Warwer BROTHERS First Nariona PICTURES Pry. Lev. v FEDERAL Commas SIONER OF

'Taxation,

Williams J.

HIGH COURT

sents accumulated profits of the appellant company which were fact employed outside Australia and its Territories in the account period, but it is contended, as I have said, that s. 24 (1) (b) req that all accumulated profits shall be regarded as part of the cay employed for the purposes of the section whether in fact empl within or without Australia or its Territories. I am unable to ac this contention, which fails to give any effect to the definition o capital employed ins. 3. Effect must be given to this definition in th absence of a contrary intention, and no such intention can, in my opinion, be found in s. 24. This section is intended, no doubt, : include in the capital employed by a company, to the extent allowe by the definition, the whole of the capital subscribed in mone other valuable consideration and the whole of the profits which company has accumulated and is using in its business instead distributing these profits by way of dividend to its shareholders, is therefore capable of including shareholders' funds which have b lost and are no longer represented by available assets. But the section also contemplates that these funds, to the extent to wl they have not been lost, and are no longer represented by availabl assets, will be found invested in the assets which constitute th commercial capital of the company. The section looks not met

to the liabilities side of the balance sheet of a company as counsel the appellant company contended, but to the assets side as The additions provided for in s. 24 sub-s. (1) (a), (b) and (ce) additions of items which would appear on the liabilities side of balance sheet of a company and would represent the whole of th

commercial assets by sub-ss. (2), (3) and (4) for the values place upon these assets in the accounts. It is also necessary to trace shareholders' funds into the commercial assets in order to make deductions prescribed by s. 24 (1) (ii) and (iii). This tracing of capital employed in any accounting period into the comn

necessary under this section for the commissioner to form an opi whether the whole or part of the capital employed by a company employed in carrying on the class of business for which a

72 C.L.R.] OF AUSTRALIA.

Section 25 of the Income Tax Assessment Act divides companies H: ©. or A.

into resident and non-resident companies. Where a company is resident its assessable income includes the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income ; where a company is non-resident its assessable income only includes the gross income derived directly or indirectly from all sources in Australia which is not exempt income. Each class of company is liable to be assessed for war-time company tax. The construction of s. 24 contended for by the appellant company would create obvious difficulties in the case of non-resident companies, as the taxable profit of such companies would be confined to income derived from a source in Australia (in which the Territory of Papua is included). The scheme of the Act would therefore appear to require that the percentage standard should be calculated upon income derived from commercial capital employed by such companies in Australia or in a Territory of the Commonwealth. Resident companies can be divided into two classes, namely those companies which have all their commercial capital employed in Australia or in a Territory of the Commonwealth, and those companies which have part of their commercial capital so employed and the residue employed outside Australia and its Territories. In the case of a resident company in the former class there would be no difficulty in construing s. 24 so as to accord with the definition. In the case of resident companies in the latter class, income derived from capital employed outside Australia and its Territories would usually be exempt under s. 23 (q) of the Income Tax Assessment Act. In the case of companies therefore to which the War-time (Company) Tax Assessment Act applies the excess of taxable profit over the percentage standard on which war-time company tax is levied would almost invariably be an excess of taxable profit derived from capital employed in Australia or its Territories.

It is the duty of the Court to read the language of an Act as a whole and to give effect, if possible, to all its provisions. The words " capital employed " in s. 24 should therefore be construed if possible So as to give effect to the meaning attributed to these words in the definition. The construction of taxation Acts should be approached in a practical and not technical manner, but, for the reasons already given, there do not appear to be any practical difficulties in the way of reading the definition of "capital employed" into s. 24; on the contrary, it would appear to be necessary to construe the section in this manner, if it is to be given a fair and reasonable operation in the case of non-resident companies. It is true that the capital required to be deducted by s. 24 (1) (ii) would in terms include

1945. Se Warner Brorners

FepreraL Commis- SIONER OF Taxation.

Williams J.

H. C. or A.

1945. Ye WARNER BroTHERS Frrsr National PrcrurEs Pry. Lp. v FrprraL Coyaus- SIONER OF Taxation.

HIGH COURT ips

capital the income from which is exempt from income tax 8. 23 (q) of the Income Tax Assessment Act. But when the w " capital employed " in s. 24 are construed to mean capital empl in Australia or a Territory of the Commonwealth, sub-s. (1) (ii) mu be read as applying to income derived from such capital which is exempt from income tax under some other provision of s. 23,

For these reasons I agree with the Board of Review that so much Df the accumulated profits of the appellant company averaged over the accounting period as were employed in the loan to the parent com- pany were not capital employed within the meaning of s. 24, so th the appeal fails and must be dismissed with costs.

Appeal dismissed. Solicitors for the appellant, Hrnest Cohen & Linton.

Solicitor for the respondent, H. F. E. Whitlam, Crown Solicitor fo for the Commonwealth,