Commissioner of Taxation (WA) v D & W Murray Ltd [1929] HCA 21; (1929) 42 CLR 332 (19 September 1929)

HIGH COURT OF AUSTRALIA

The Commissioner of Taxation of Western Australia Respondent, Appellant; and D. & W. Murray Limited Appellant, Respondent.

H C of A

On appeal from the Supreme Court of Western Australia.

19 September 1929

Knox C.J., Rich and Dixon JJ.

Downing K.C. (with him Wolff), for the appellant.

Sir Walter James K.C. and J. P. Dwyer, for the respondent.

Downing K.C., in reply.

The Court delivered the following written judgment:—

Sept. 19

Knox C.J.,

Rich and Dixon JJ.

This is an appeal by the Commissioner of Taxation of the State of Western Australia from a judgment of the Supreme Court of that State given upon a case stated under sec. 31 of the Dividend Duties Act 1902-1924 W.A.. By sec. 6 of this statute every company carrying on business in Western Australia is required in every year to forward to the Commissioner of Taxation a return setting forth the amount and details of all profit made by such company during the calendar year immediately preceding the return together with a copy of its balance-sheets for that period. The Commissioner must thereupon assess the profits made by such company in Western Australia, and the company then becomes liable to pay a tax of 1s. 3d. in the pound upon the profits so assessed.

The respondent is a company incorporated in England which carries on in Western Australia as well as in the other States of the Commonwealth the business of wholesale softgoods warehousemen. It made a return as for the year 1926 and forwarded its balance-sheets to the Commissioner, who assessed the profits which he considered the Company made in Western Australia during that year. The Company contends that he included three sums amounting to £5,529 11s. 9d. which were not "attributable" to its business operations in Western Australia and that its assessment should be reduced by this amount.

The Company's head office in London, where its directors meet, carries out the operations of buying and exporting the goods required by its various Australian branches for the purpose of the business which they conduct in the several States. In the accounts of the Company of the dealings between the head office and each Australian branch, the branch is in the first instance debited, and the head office credited, with a charge of 5 per cent upon the amount of the purchases for the branch. This is considered to be a fair and usual charge for the skill and judgment exercised and the work done by the head office in selecting and buying the goods, packing them, arranging for freight and insurance, causing them to be shipped, and doing whatever else is required. At the end of every half-year the actual expenses incurred by the head office, including the cost of maintaining the London or buying organization as well as the amount of the London directors' salaries, interest and all other outgoings, are calculated. If the total amount of the 5 per cent "buying commission" is greater than this sum the difference is credited to the Australian branches, at each half-yearly balance date, in the proportion that their respective purchases made by the head office bear to the total of such purchases.

In the year 1926 a sum of £1,301 12s. 6d. was credited to the Western Australian branch as its proportion of the excess of the 5 per cent upon the purchase of all Australian branches over the actual London expenses. This is the first of the three sums which the Company contends should have been excluded in calculating the profit made by the Company in Western Australia. The sum does not, of course, represent any actual profit or revenue or receipt of the Company. It is only a credit on account of, and in reduction of, a debit made by one of the Company's houses against another. No doubt, after the debit of 5 per cent on purchases is reduced by such a credit, the reduced amount roughly represents the actual expenses incurred by the Company in buying and exporting goods for sale here by the branch in question. To ascertain accurately the actual cost attributable to the goods of the particular branch, a dissection of the expenditure of the head office would be necessary; but it is not unlikely that over any considerable period of time there would be little difference in the results produced by the two methods. The respondent Company recognizes that this is the true character of the credit of £1,301 12s. 6d., and its contention is not based upon the view that the sum is an English receipt or forms an item of revenue gained in England. It concedes that in computing the profits made by the Company by acquiring goods in England and selling them in Western Australia, the credits and debits between the houses would be disregarded and the true net cost only of purchasing the goods and exporting them to Western Australia would be allowable as a deduction from the receipts in Western Australia. But the Company says that when the net profits arising from the Company's operations of buying goods in England and selling them from its Western Australian warehouse have been calculated, they cannot all be considered as earned or made in Western Australia. Some part of them, it says, must be regarded as produced by the buying and other operations in England, and therefore as "attributable" to a source outside Western Australia. To ascertain how much of the profits are "attributable" to the business in Western Australia the respondent Company desires to deduct the whole 5 per cent on purchases from the profits, and not merely that amount reduced by the credit of £1,301 12s. 6d. as the Commissioner has done. It says that the whole 5 per cent "represents an expedient and reasonable method of calculating that part of the profits of the Company applicable to the buying operations carried on by the head office in London." The second of the three sums composing the amount of £5,529 11s. 9d. which the respondent Company wishes to exclude from its profits made in Western Australia, is a sum of £3,305 13s. credited by the head office to the Western Australian branch. This sum consists of the amounts which in 1926 the sellers of goods bought by the head office for the Western Australian branch allowed by way of discount from the price for immediate payment in cash. The manufacturers often sold goods to the head office upon terms, or were prepared to do so. When the head office, instead of taking the usual trade terms, paid prompt cash, it was frequently able to obtain a discount. Whether it obtained any and, if so, what discount depended upon negotiations between it and the seller. When it obtained such a discount it was credited to the branch on the debit note which accompanied the shipment of goods. The contention of the respondent Company is that these discounts were obtained by the use of the Company's capital in London and by the exertions and the judgment of the staff in the head office. Therefore, the contention is, the increase in net profit caused by the saving in expenditure so effected is "attributable" not to operations in Western Australia but to those in London. The third of the three sums which the respondent Company seeks to exclude in the ascertainment of Western Australian profits is an amount of £922 6s. 3d., consisting of rebates upon charges for freight, storage and handling, and upon premiums for insurance, paid in respect of shipments of goods to Western Australia in 1926. These rebates the head office was enabled to obtain by reason of the large volume of freight and insurance business which it controlled. By giving its custom to special shipping, insurance and other companies it obtained periodical allowances by way of rebate. These it collected, and at each half-yearly balance date it allocated and credited the total to the Australian branches in the proportion that their respective purchases made by the head office bore to the total purchases made by the head office. When such a credit is set against the amount with which the branch has been debited during the half-year for freight, storage and handling and for insurance, the balance roughly represents the net expenditure of the Company upon these charges in respect of the goods of the branch. Again it should be observed that an accurate ascertainment of the actual net amount to be charged against the branch for its goods would necessitate a dissection—this time a dissection and allocation of the rebates. The respondent Company contends: first, that the rebates form an actual item of gross revenue earned in London by the use of the capital there and by the aggregation of the Company's dealings, so that it is derived from operations outside Western Australia; second, that if the amount credited, on account of rebates, to the Western Australian branch be thrown against the expenditure upon freight, storage and handling charges, and insurance in respect of the goods shipped to that branch, so as to reduce the amount of that expenditure, the consequent increase in the net profit from the trade in Western Australia is not attributable to the operations carried on there, but to what was done in London.

The majority of the Supreme Court (Northmore and Draper JJ., Burnside J. dissenting) held that all three sums should be excluded, subject, however, to this qualification, namely, they considered that the Commissioner was not bound to adopt 5 per cent as a proper apportionment for ascertaining the profits attributable to the buying operations in London, but could adopt some other standard, and they referred that item back. We are unable to agree in this conclusion. We think that none of these sums should have been excluded in ascertaining the profits made by the respondent Company in Western Australia.

The business of wholesale softgoods warehousemen, which the respondent carries on, depends for its profits or gains upon the sale of softgoods bought or acquired for that purpose. Profits are ascertained by comparing on the one side the amount representing the total of (1) the value of stock on hand at the beginning of an accounting period, (2) the cost of purchases and (3) the expenses of conducting the undertaking in the meantime, with the amount representing (a) the value of stock on hand at the end of the period, and (b) the amount recovered by the sale of the commodities on the other side. This means that the profits are obtained and recovered by selling the goods. In our opinion the place where the whole profit of such a business is made is that where the goods are sold. It is, of course, true that buying the goods is a necessary part of a business of this kind, which derives its profits from selling them. It is also true that skill and judgment in buying are or may be essential to the successful or profitable conduct of the business. But it does not follow that in order to determine where the profits were made it is proper to inquire into all the causes which, in combination or in succession, operated to produce them. If it were possible to discover and discriminate among the innumerable factors which contribute to the profitable exercise of a trade and to assign locality to each of them, still no light would be thrown upon the place where profits were made. To attempt to appraise the relative efficacy or potency of these contributory factors, when and if ascertained, and to distribute the profit accordingly among the localities to which the factors have been assigned, is to lose sight of the true nature of the question, which is not why, but where, the profits were earned. The case is not one in which operations in one place have produced a merchantable commodity, or have given or added value to things, marketed in another. In such cases value or wealth has been produced or increased and is contained in disposable assets. In other words, unrealized profits exist in the territory whence they are transported for the purpose of sale. There is as much reason why stock on hand as at a given place should be taken into a commercial account at a value for the purpose of ascertaining profit in a locality, as there is why stock on hand as at a given point of time should be taken into account at a value for the purpose of ascertaining profit during a period.

In Commissioners of Taxation v. Kirk[1] it was evident that some part of the value or wealth converted into money by the operations or transactions out of New South Wales had been brought into existence in New South Wales and was contained in the commodity before it was shipped. The profit made in New South Wales was real but unrealized. In Mount Morgan Gold Mining Co. v. Commissioner of Income Tax (Q.)[2] Rich and Starke JJ., whose opinions prevailed, both held that the gold content of the blister copper had been disposed of by the taxpayer for a consideration which consisted, not only of the money price, but also of the right to receive or share in any profits derived from the exportation for sale of an equivalent amount of gold. Rich J. said that he agreed that the price of £4 4s. 2d. per ounce did not include the right to premiums obtainable on the gold when exported, and that this right was retained by the taxpayer[3]. He emphasized the importance of this by the questions which he propounded as requiring an answer, if, contrary to this view, the gold were sold outright to the refining company, and the right to export the gold and get the premium abroad was not reserved[4]. Starke J. said that a stipulation of the agreement between the taxpayer and the refining company made "it plain that the appellant retained for its own benefit all the value of the gold content of its blister copper beyond the price mentioned in the agreement"[5]. This was a valuable right or privilege obtained by the taxpayer. In computing the income derived from the production and disposal of blister copper with its content of precious metal, the reservation or acquisition of this valuable right or privilege could not be left out of the account. The additional money afterwards received as a result of the exercise of the right or privilege necessarily represented in part the value at which the right or privilege itself should be taken into account.

In Dickson v. Commissioner of Taxation (N.S.W.)[6] the taxpayer retained or obtained, when it disposed of its gold, the right to the premiums to be derived from export and sale abroad under the same scheme. Isaacs J. and Rich J., who, with Starke J., constituted the majority whose views prevailed, each collected from the case stated facts which connected the money realized abroad with the operations conducted in New South Wales, and considered the case indistinguishable from that of the Mount Morgan Gold Mining Co. Starke J. said[7]:—"The arrangement for the sale of coin or bullion was but a final stage of the company's operations, which aimed at the realization of the full value of the gold content of the auriferous ore or stone extracted by it from the earth, in New South Wales. It was ... merely incidental to the main purpose of the business of the company and a conventional way of carrying it out." The Court's order declared that the sum obtained as a result of selling gold abroad "should be apportioned as between New South Wales and places outside New South Wales for the purpose of ascertaining what portion of the said sum was income derived from any source in the said State or earned in the said State"[8]. We do not think this, or the somewhat similar declaration in the Mount Morgan Co.'s Case[9], meant to start an investigation into the comparative virtue, as causes contributing to final profit, of the many factors in New South Wales and abroad which determined the financial success of the taxpayer's operations. The apportionment directed appears to us rather to contemplate the ascertainment of the actual profit earned but unrealized in New South Wales, which was represented in the money sum afterwards recovered abroad.

In Commissioner of Taxation v. Lewis Berger & Sons (Australia) Ltd.[10], decided by Starke J., goods were produced in Australia and sold in New Zealand. The learned Judge treated the Board of Review's determination of the amount of Australian profit as involving no point of law. Here again commodities, stock-in-trade, were produced, and they contained profit represented in the sums afterwards realized. In Michell v. Commissioner of Taxation[11] the same learned Judge dealt with a case in which buying was perhaps one of the principal Australian operations of the taxpayer who, however, here treated, classified and otherwise prepared for sale some of the goods which he bought. The question, what amount of the sum recovered abroad represented income derived directly or indirectly from sources in Australia was decided as a matter of fact. The facts, so far as they appear from the report of the case, suggest that what the taxpayer did in Australia resulted here in a real enlargement or enhancement of value contained in the goods before exportation which was consequently included in the prices they realized in Europe. We do not understand his Honor to direct his observations to anything but the very difficult problem of determining this amount.

In the case now to be decided the respondent Company's business operations conducted in England by its head office consisted only in buying. They neither gave nor added value to the things which were purchased. There were no unrealized profits brought into existence, and contained in the goods when exported from England. The case is, we think, governed by the principles established by Sulley v. Attorney-General[12], and the many cases which follow that authority. It is true that these cases were decided upon a provision which taxed persons not resident in the United Kingdom "for and in respect of the annual profits or gains arising or accruing ... from any profession, trade, employment, or vocation exercised within the United Kingdom" (16 & 17 Vict. c. 34, sec. 2, Sched. (D), and 8 & 9 Geo. V. c. 40, Sched. D, clause 1 (a) (iii.), sec. 1). But refined distinctions ought not to be drawn between the forms of expression used in legislation dealing with this subject and directed to discriminate between extra-territorial and intra-territorial profits or income. Moreover, these authorities proceed upon a principle and not upon the particular meaning of words or expressions. Their application to enactments in pari materia is fully authorized by the Privy Council in Lovell & Christmas Ltd. v. Commissioner of Taxes[13]. In Sulley's Case, a full statement of the facts of which is set out in the special verdict[14], the Crown sought to tax the profits and gains arising from a business of general merchants carried on in New York and at Nottingham. The business done in the house at Nottingham consisted in purchasing goods in England and shipping them for exportation to New York, and doing things ancillary to the exportation, such as packing the goods. The business done in the house in New York consisted in selling the goods, and other goods purchased in France, Germany and America. "The goods ... are in no case manufactured or resold in England prior to their shipment and exportation, nor is any profit made by the ... co-partnership by means of any manufacture or resale of goods in England; the profits of the ... co-partnership, in respect of goods purchased in England, consisting entirely of the increase in price or value obtained by the resale in America of such goods so purchased in England and exported as above mentioned"[15]. Cockburn C.J., in delivering the judgment of the Exchequer Chamber, said:—"The question is, whether there is a carrying on or exercise of a trade in this country. I think there is not, looking at the sense in which the term is used and having regard to the subject matter of the statute. Wherever a merchant is established, in the course of his operations his dealings must extend over various places; he buys in one place and sells in another. But he has one principal place in which he may be said to trade, viz., where his profits come home to him. That is where he exercises his trade"[16]. Further: "The profits of the firm in America do not accrue in respect of any trade carried on in this country, but in respect of the trade carried on in New York, where the main business is conducted"[17]. It is to be noticed that in the argument of Mr. Mellish (as he then was) for the firm, which Willes J. found of such assistance, he said:—"Where the business consists of buying here and selling abroad, the profit resulting from a purchase here cannot be separated or distinguished from the profit made on the resale of the goods abroad; in fact there is but one profit. Possibly, in the case of persons manufacturing goods here and selling them abroad, there might be a profit on the manufacture capable of being distinguished from the profit on the sale"[18]. This statement anticipates the effect of the decisions since given.

The principle of this decision has been applied by the House of Lords (e.g., Grainger & Son v. Gough[19]; Greenwood v. F. L. Smidth & Co.[20]; Maclaine & Co. v. Eccott[21]; and cp. Tarn v. Scanlon[22]). It has been adopted by the Privy Council and applied where "the business which yields the profit is the business of selling goods on commission" (Lovell & Christmas Ltd. v. Commissioner of Taxes[23]). It was recognized in this Court in the case of the Mount Morgan Co. There Starke J. said[24]:—"The Acts do not contemplate going further back for the purpose of taxation than the locality of the business operations from which profits are directly derived. If contracts form the essence of the business (Lovell's Case10(1908) A.C., at p. 51.), then, for the purpose of determining the locality from which the income is derived, you look no further back than the place where the contracts are made."

We think the profit recovered or realized by the selling business which the respondent Company conducts in Western Australia is one profit, and is made wholly in Western Australia. The fact that it is swelled or increased because the expenditure abroad necessarily incurred for the purpose of earning it, has been reduced by the business operations of the Company abroad does not give to any part of the profit a locality outside Western Australia. It may show that one of the causes why profits were made in Western Australia consisted in things done abroad. It does not show that any of the profits were made where these things were done.

There remains for consideration the separate argument advanced for the respondent Company in respect of the rebates obtained from shipping, insurance and other companies, to the effect that they formed an actual item of gross revenue earned in London. This argument seeks to avoid the application to this item of the views we have expressed, by denying that it forms part of the money realized upon the sale of the goods and assigning to it the character of revenue derived abroad from operations abroad. We do not think this is its true character. We think that in a proper ascertainment of the profits of the business in Western Australia the rebates would be thrown against the expenditure or payments in respect of which they were made and received, and therefore treated as a mere diminution of expenses. It is to be noticed that we are not here dealing with an artificial statutory method of determining profits such as one by which gross receipts from sources within a territory are to be taken as a base from which deductions are to be made. The Dividend Duties Act 1902-1924 W.A. simply requires an ascertainment of "profits." (See Lawless v. Sullivan[26].)

We think the appeal should be allowed.

Appeal allowed with costs. Order of the Supreme Court discharged. Question answered: The Court is of opinion that the whole of the sum of £5,529 11s. 9d. mentioned in the special case is profit made in Western Australia. The respondent's appeal to the Supreme Court dismissed with costs including the costs of the special case.

Solicitor for the appellant, J. L. Walker, Crown Solicitor for Western Australia.

Solicitors for the respondent, Stone, James & Co.