Case: Harding v Federal Commissioner of Taxation [1917] HCA 13 ; (1917) 23 CLR 119
Outcome: cited
The following propositions are to be found in the judgment of Dixon J: (1) The question which of rival methods of accounting should be employed in identifying taxable income falls for the courts to determine according to legal principles, but it is a mistake to search only the legislative text for an answer, because such notions as income, profits and gains are conceptions of the world of affairs, and particularly of business, covering an infinite variety of activities, for which no single formula can be devised (at 151 152). (2) "... in nearly every department of enterprise and employment the course of affairs and the practice of business have developed methods of estimating or computing in terms of money the result over an interval of time produced by the operations of business, by the work of the individual, or by the use of capital. The practice of these methods of computation and the general recognition of the principles upon which they proceed are responsible in a great measure for the conceptions of income, profit and gain and, therefore, may be said to enter into the determination or definition of the subject which the legislature has undertaken to tax. The courts have always regarded the ascertainment of income as governed by the principles recognized or followed in business and commerce, unless the legislature has itself made some specific provision affecting a particular matter or question" (at 152). (3) "The tendency of judicial decision has been to place increasing reliance upon the conceptions of business and the principles and practices of commercial accountancy ... But the process by which the principles and practices evolved in business or general affairs are drawn upon for the solution of questions presented to courts of law almost inevitably leads to a development in the law itself. For, under our system of precedent, a decision adopting or resorting to any given accounting principle or application of principle is almost bound to settle for the future the rule to be observed and the rule thus comes to look very like a proposition of law" (at 153 154). (4) "Unless in the statute itself some definite direction is discoverable, ... the admissibility of the method which in fact has been pursued must depend upon its actual appropriateness ... [t]he inquiry should be whether in the circumstances of the case it is calculated to give a substantially correct reflex of the taxpayer's true income. We are so accustomed to commercial accounts of manufacturing or trading operations, where the object is to show the gain upon a comparison of the respective positions at the beginning and end of a period of production or trading, that it is easy to forget the reasons which underlie the application of such a method of accounting to the purpose of ascertaining taxable income. Although the field of profit-making which it covers in practice is probably much greater than any other among the manifold forms of income or revenue, it is a system of accounting which does not represent the primary or basal position from which an investigation of income for taxation purposes begins. Speaking generally, in the assessment of income the object is to discover what gains have during the period of account come home to the taxpayer in a realized or immediately realizable form" (at 154 155). (5) The expressions "derived" and "arising or accruing" ordinarily signify receipt, but not in relation to debts due to a trading company, in which case debts due but not paid must be included as income. With regard to non-trading income there must be something "coming in", that is to say, "for income tax purposes receivability without receipt is nothing" (at 155 quoting from Sir Houldsworth Shaw &amp; Baker, Law of Income Tax p111). (6) "The reasons which underlie the practice of estimating for taxation purposes the income from trade or manufacture by means of a commercial profit and loss account consist in the impracticability of computing income in any other way and in the adoption for fiscal purposes of recognized commercial principles. The computation of profits from manufacture and trading has always proceeded upon the principle that profit may be contained in stock-in-trade and 'outstandings'" (at 155). (7) "... a tax upon the profits or income of such a business [a manufacturing or trading business] must be understood as a tax upon the profits or income computed according to the system, because, according to common understanding and commercial principles, that is the method of determining the profits" (at 156). (8) The word "derived" is the equivalent of "arising or accruing" ( Harding v Federal Commissioner of Taxation [1917] HCA 13 ; (1917) 23 CLR 119 at 133), and none of these three words, nor the words "income", "profit" or "gain" in the statute, throw any light on the question of which basis of accounting is appropriate to reflect income in the circumstances of a particular case (at 157). (9) "Where there is nothing analogous to a stock of vendible articles to be acquired or produced and carried by the taxpayer, where outstandings on the expenditure side do not correspond to, and are not naturally connected with, the outstandings on the earnings side, and where there is no fund of circulating capital from which income or profit must be detached for actual enjoyment, but where, on the contrary, the receipts represent in substance a reward for professional skill and personal work to which the expenditure on the other side of the account contributes only in a subsidiary or minor degree, then I think according to ordinary conceptions the receipts basis forms a fair and appropriate foundation for estimating professional income. But this is subject to one qualification. There must be continuity in the practice of the profession" (at 157 158). 128 Bowaters 38 TC 593 is said to be against the Commissioner's contention in the present case. I note that I do not see any relevant distinction between the concepts "arising" in ss 19 and 20(1) of the Finance Act 1937 (UK) and "derived" in the Australian s 128B(1): see Harding v Federal Commissioner of Taxation [1917] HCA 13 ; 23 CLR 119 at 133 noted at [106] above.