Case: Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314
Outcome: discussed
Arthur Murray (NSW) Pty Ltd v Commissioner of Taxation [1965] HCA 58 ; (1965) 114 CLR 314 ( Arthur Murray ) was, in a sense, the converse of Carden's Case [1938] HCA 69 ; 63 CLR 108. The taxpayer company received fees for dancing lessons yet to be given. It placed the fees in a suspense account until the lessons were given, when it transferred them to its revenue account. The High Court held that the fees were not assessable income at the time of receipt. 146 In Commissioner of Taxation v Citibank Ltd (1993) 44 FCR 434, Hill J, with whom Jenkinson and Einfeld JJ agreed, cautioned against a too ready reliance on business and accounting practice relating to preparation of the company's profit and loss account required in accordance with s 269(1) of the Companies (New South Wales) Code (at 443 446). His Honour stated (at 445 446): With respect to his Honour, who presumably must be taken as having decided otherwise, I do not think that the accounting evidence in the present case establishes that the amount derived each year by applying the financial or actuarial method represents income in ordinary concepts. What that evidence establishes is that the outcome of the finance or actuarial method is an appropriate figure to be used in the preparation of the profit and loss account of the respondent for the year in accordance with the Companies (New South Wales) Code : s 269(1). If the relevant issue were the determination of the profit of the respondents, or whether that profit was to be seen as on revenue account, the evidence would clearly be most cogent. But it must be remembered that the role of the accounting standards is in the determination of profit so as to ensure that financial statements, required to be prepared by statute, give a true and fair view and not the determination of "income", notwithstanding that those two concepts may, as will be seen, sometimes overlap. Thus Professor Walker [an expert witness] states that he has been asked to advise as to the correct method of accounting in relation to the leases in question. But his affidavit and subsequent explanation makes it clear that he has answered that question by reference to the companies law for the purposes of which the relevant standards have been prepared and with which of course each of the respondents was obliged to comply. Mr Westworth's affidavit [regarding accounting practices] makes clear that he too has addressed himself to that issue, not relevant in the present proceedings. All that may be said is that if there be no impediment in the Act to bringing into account, in a case such as the present, a net profit figure as gross income, then that profit figure will need to be calculated in accordance with the accounting standards. The real issue for decision is rather a question of construction of the Act, namely, whether in a case such as the present, the scheme of the Act precludes treating as gross income the net profit calculated in accordance with the financial or actuarial method. Hill J noted earlier, however, that accounting evidence was often relevant and often highly significant in resolving issues under the Act. He gave as an example the issue whether a cash receipts or accruals basis of accounting will give "a true reflex of the income derived by a taxpayer" (at 443, citing Carden's Case [1938] HCA 69 ; 63 CLR 108 his Honour also cited Arthur Murray [1965] HCA 58 ; 114 CLR 314). 149 In Commissioner of Taxation (Commonwealth) v Sun Alliance Investments Pty Limited (in liq) [2005] HCA 70 ; (2005) 225 CLR 488, the High Court in a joint judgment, drew attention to the fact that the meaning of the word "derived" in a particular provision could not be ascertained without at least some reference to the thing said to be derived (in that case, the profits of the company) (at [42]). In particular their Honours cautioned against conflating the concept of derivation of income with derivation of profits. Their Honours referred to the fact that for the most part the notion of "income" directs attention to "receipts" by a taxpayer. Their Honours further referred to the late Professor RW Parsons's work, Income Taxation in Australia (The Law Book Company, 1985) in which the learned author stated (at [2.10]): "For the most part, the law expresses an ordinary usage notion of derivation of a receipt". I do not think that their Honours or the late learned author were intending to exclude the possibility that business and accounting practice might demonstrate, in the case of the particular category of income, that it is derived at a time other than upon receipt. Arthur Murray [1965] HCA 58 ; 114 CLR 314 stands against the existence of any such universal rule.