Case: Bowaters Sales Co Ltd v Commissioners of Inland Revenue (1958) 38 TC 593
Outcome: distinguished
The authorities cited by the applicants are St Lucia Usines and Estates Company Limited v Colonial Treasurer of St Lucia [1924] AC 508 ( St Lucia ) at 512; Commissioner of Taxes (SA) v The Executor Trustee and Agency Company of South Australia Limited [1938] HCA 69 ; (1938) 63 CLR 108 ( Carden's Case ) at 155; Permanent Trustee Co v Federal Commissioner of Taxation (1940) 6 ATD 5 ( Prior's Case ) at 13; South Australia v Commonwealth [1992] HCA 7 ; (1992) 174 CLR 235 at 253; and Bowaters Sales Co Ltd v Commissioners of Inland Revenue (1958) 38 TC 593 ( Bowaters ) at 597 599. As well, the applicants refer to the Commissioner's Public Ruling TR 98/1 at [19], in which the Commissioner has said that as a general rule, the receipts method is appropriate to determine income derived from investments, although there are exceptions, such as in the case of interest from a business of money lending carried on by the taxpayer. 69 The Commissioner distinguishes Bowaters 38 TC 593 on the basis that Harman J noted (at 597) that "[t]here is no evidence here that the function of this Company was mainly the holding of investments". The Commissioner suggests that his Lordship was intending to distinguish holding companies from purely passive investment companies. The evidence 70 The Commissioner relies on two forms of evidence as being relevant to the question whether ABB Zurich derived income consisting of the dividend when the dividend was declared. The first is evidence relating to the international group of companies known as the ABB Group and its accounting practices. This evidence is found in an affidavit of Alfred Storck of the ABB Group and documentary exhibits. The second class of evidence is expert evidence of an accountant, Brigid Therese Curran, adduced by the Commissioner. The Commissioner read Ms Curran's affidavit subject to objection by the applicants on the ground of relevance. 71 Mr Storck is the Deputy Chief Financial Officer and the person responsible for Corporate Finance and Taxes for the ABB Group. In 1996, he was employed by ABB Zurich as head of its Taxation Division. Mr Storck states that ABB Group "specialises in the engineering of power and automation technologies" and "supplies products and services to utility and industrial customers around the world". 119 The last of the cases principally relied on by the applicants, Bowaters 38 TC 593, concerned a dividend declared by an Australian subsidiary of a United Kingdom parent. The case concerned provisions of the Finance Act 1937 (UK) and the Finance Act 1952 (UK). The dividend in question was declared on 16 December 1953 but not paid until 28 January 1954. The relevant accounting period commenced on 1 October 1953 and ended on 31 December 1953. Accordingly, the dividend was declared during that chargeable accounting period, but paid after it. 120 The taxpayer company was the main selling company of the Bowaters organisation and was the principal member of a group of companies. It had two subsidiaries that were ordinarily resident in the United Kingdom and a number of non-resident subsidiaries, including the Australian company that declared the dividend. At the annual general meeting of the Australian company held on 16 December 1953, the dividend was declared, in respect of its accounting year ended 30 September 1953, payable forthwith. Bowaters' accounts for the year ended 30 September 1953 anticipated the dividend to be declared by the Australian company. 121 The particular dividend was not included in Bowaters' computation of its profits for the purposes of Excess Profits Levy for the period of three months to 31 December 1953, on the ground that it was received after 31 December 1953. However, the Crown included it in the assessment of profits to Excess Profits Levy for that three month period on the ground that the income arose during that period. It was against that assessment that Bowaters appealed. The Crown affirmed the assessment. As required by Bowaters, a case was stated for the opinion of the High Court. 124 Harman J noted that there was no evidence that the functions of Bowaters was mainly the holding of investments. Rather its business was mainly that of trading in paper, although it also had a number of wholly owned subsidiaries from which it might draw dividends. Accordingly, s 19(4) had no application. 125 His Lordship considered that various English authorities to which he referred established that "excepting the case of receipts from trade or receipts analogous to trading receipts, the [fundamental conception of Income Tax legislation] is ... receipt and not receivability" (at 599). His Lordship rejected the Crown's submission that the dividends were as much a part of Bowaters' trade as were the profits of its trading activities. 126 It followed that the expression "income arising" in the context before his Lordship (a dividend declared and paid by an Australian subsidiary to its United Kingdom parent) and in every context except that of trade debts, meant income received. The company's appeal was allowed. 127 Harman J expressed the opinion (at 599) that the method by which Bowaters kept its accounts had no relevance for tax purposes. 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. 129 Unlike Bowaters, ABB Zurich would apparently have qualified for the purposes of s 19(4) of the Finance Act 1937 (UK) as a company whose functions consisted wholly or mainly in the "holding of investments". Indeed, the only business of ABB Zurich was that of managing the affairs of its some 1,000 subsidiaries. It appears, although not clearly so, that the reason why Harman J did not accept a submission by the Crown that the receipt of dividends was as much a part of Bowaters' trade as was the profit from its trading activity, was that s 19(4) did not apply (at 599). In other words, if s 19(4) had applied, as it apparently would have done to the circumstances of ABB Zurich, his Lordship would have treated a dividend from its subsidiary in the same way as he would have done a trading receipt. It seems that his Lordship would have treated the dividend as derived when the debt for it arose, that is to say, when the subsidiary declared the dividend (at 598). 130 Before returning to consider the evidence, in particular that of Ms Curran, I will refer to the authorities called in aid of the Commissioner.