Bankers & Traders' Insurance Co Ltd v Federal Commissioner of Taxation [1946] HCA 39; (1946) 73 CLR 39 (18 October 1946)

HIGH COURT OF AUSTRALIA

Bankers and Traders' Insurance Company Limited Appellant; and The Federal Commissioner of Taxation Respondent.

H C of A

18 October 1946

Latham C.J., Rich, Starke, Dixon and McTiernan JJ.

Barwick K.C. (with him Hardie), for the appellant.

Taylor K.C. (with him Chambers), for the respondent.

Barwick K.C., in reply.

The following written judgments were delivered:—

Oct. 18

Latham C.J.

The War-time (Company) Tax Assessment Act 1940-1944 imposes a tax upon the amount by which the taxable profit derived by any company during the accounting period exceeds the percentage standard: s. 13. "Taxable profit" is defined as meaning the amount remaining after making certain specified deductions from the taxable income of the accounting period as assessed under the Income Tax Assessment Act 1936-1940. The percentage standard is an amount equal to the statutory percentage of the capital employed or deemed to be employed during the accounting period (or, in a particular case, a lesser period): s. 19. Subject to the Act, the statutory percentage is 5 per cent: s. 20.

"Capital employed" is defined in s. 3 in the following terms: "... the capital of a company employed in Australia or in a Territory of the Commonwealth in gaining or producing the taxable profit."

(It is not necessary to refer to any Territories for the purpose of this case.)

This case stated is concerned with the application of the definition just quoted in the case of s. 24 of the Act, which provides that: "Subject to section twenty-five of this Act, the capital employed in any accounting period shall, for the purposes of this Act, be ascertained by adding the following amounts, namely" then follow five paragraphs, (a) to (e)—and making deductions therefrom, numbered (i) to (vi).

The Bankers and Traders' Insurance Co. Ltd. is a company incorporated in New South Wales and carrying on business in the Commonwealth and in various other countries. The company owned securities of a total value of £91,875, made up as follows:—

British War Loan£26,730Great Britain Savings Bonds10,000Canadian Victory Loan Bonds1,119Canada Permanent Mortgage Corporation3,058Commonwealth of Australia Stock registered in London6,968Metropolitan Water Sewerage and Drainage Board Bonds (Dollar Bonds)3,294Australian Consolidated Bonds with—(i) Department of Insurance Canada27,924(ii) Siamese Legation, London12,782

The Commissioner of Taxation has treated these securities as representing capital employed outside Australia and has deducted the amount of £91,875 from the "capital employed" as calculated under s. 24. The Commissioner contends that only such portions of the amounts specified in pars. (a) to (e) of s. 24 (1) as can be shown to represent the value of assets employed in Australia are to be included in calculating the "capital employed." In fact the Commissioner has made the calculation required by s. 24 (1) (additions and deductions) and has deducted from the finally resulting sum the value of the assets of the company which, in his opinion, are employed outside Australia. It is contended for the Commissioner that this procedure is authorized by the section.

The taxpayer, on the other hand, contends that s. 24 is the means provided of ascertaining what is the "capital employed" for the purposes of the Act, and that when the calculations required by the section have been made there is no justification for making any further deduction on account of any assets of a company being employed outside Australia. The first question asked in the case stated by my brother Rich is as follows:—

In ascertaining for the purposes of the War-time (Company) Tax Assessment Act the capital employed by the appellant company in any accounting period is the respondent entitled to deduct capital employed outside Australia in gaining or producing income which is taken into account in assessing the income of the said period under the Income Tax Assessment Act?

The second question inquires whether the capital or any portion of the capital of the company invested in the securities already mentioned constitutes capital of the company employed in Australia within the meaning of the Act. This question arises only if the first question is answered in the affirmative.

Section 24 (1) provides as follows:—

Subject to section twenty-five of this Act, the capital employed in any accounting period shall, for the purposes of this Act, be ascertained by adding the following amounts, namely:—

(a)

the capital paid up in money or by other valuable consideration, averaged over the accounting period;

(b)

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 has been created out of premiums received on the issue of shares;

(d)

the amount by which the value prescribed by sub-section (2), (3) or (4) of this section as the value of any asset to which that sub-section applies exceeds the value of that asset as appearing in the accounts of the company at the commencement of the accounting period or, if no such value appears in the accounts of the company at the commencement of the accounting period, the amount prescribed by that sub-section; and

(e)

in the case of a life assurance company, the excess (if any) of reserves for liabilities over the amount ascertained as the "calculated liabilities" for the purposes of section one hundred and fourteen of the Income Tax Assessment Act, and deducting therefrom—

The Income Tax Assessment Act, s. 23, provides in par. (q) that income derived by a resident from sources out of Australia where that income is not exempt from income tax in the country in which it is derived shall be exempt from tax; and in par. (r) that income derived by a non-resident from sources wholly out of Australia shall be exempt from tax. These provisions produce the result that where capital which is a source of income is employed out of Australia the income derived from it is not taken into account in assessing for the purposes of income tax the income (1) of a non-resident taxpayer or (2) of a resident taxpayer when the income so derived is not exempt from income tax in the country where it is derived. As the amount of taxable profit under the War-time (Company) Tax Assessment Act is determined by deducting certain amounts from income as assessed under the Income Tax Assessment Act, the effect of s. 24 (1) (ii) of the former Act is to take out of the "capital employed" for the purposes of that Act capital outside Australia which was a source of income but which did not contribute to the income assessable under the Income Tax Assessment Act, and therefore which did not contribute to the taxable profit under the War-time (Company) Tax Assessment Act. Thus par. (ii) excludes from "capital employed" assets outside Australia which are capital and which produce income in the two cases mentioned.

Two views have been presented of the combined effect of the definition of in s. 3 and the directions for the calculation of "capital employed" in s. 24.

On behalf of the Commissioner it has been argued that s. 24 requires an estimate of the value of the capital assets of the company which are found to be employed in Australia in gaining or producing the taxable profit, if those assets can be assigned to one or other of the categories (a), (b), (c), (d) and (e) specified in s. 24 (1) less the deductions specified in pars. (i), (ii), (iii), (iv) and (v). Upon this view when an amount is estimated, for example, under par. (a) of s. 24 (1) it will be necessary to inquire whether the capital paid up in money was represented by assets actually employed in Australia, and only the amount representing the value of those assets should be taken into account under that paragraph. It was also suggested, though not definitely argued, that the deductions should be limited to the value of ascertainable assets which are employed in Australia. Thus under such a deduction as (iii)—"any capital, averaged over the accounting period, invested in shareholdings in any other company"—it would be necessary to consider whether the assets (that is, presumably, shares) representing that capital were employed in Australia—though, apparently, the amount invested might be greater or less than the value of the shares. The Commissioner relies upon the decision in Warner Bros. First National Pictures Pty. Ltd. v. Federal Commissioner of Taxation[1].

The other view of these provisions is that s. 24 simply directs a calculation of amounts of money which is designed to ascertain the amount of the shareholders' money which has been put at risk for the purpose of endeavouring to make taxable profits. The definition of "capital employed" is applied by regarding s. 24 (1) as directing that, for the purposes of the Act, the capital employed by a company in Australia in gaining or producing the taxable profit is to be taken as the sum total of the items mentioned in pars. (a) to (e) in s. 24 (1), less the deductions specified in pars. (i) to (vi), and that it is wrong to make an inquiry in relation to any of the categories or in relation to the final total whether any of the assets, the values of which may have entered into the computation of that total, are employed in Australia.

The application of s. 24 does not result in ascertaining the existing capital of a company in the sense of assets of the company of a capital nature. It prescribes an artificial method of ascertaining an amount of money upon which, in the opinion of Parliament, the shareholder might fairly expect a fair return, such return being fixed at the percentage standard. Section 13 then imposes a tax upon the excess of taxable profits over that return.

Paragraph (a) requires the inclusion in "capital employed" of "the capital paid up in money or by other valuable consideration, averaged over the accounting period." The application of this provision results simply in the ascertainment of a sum of money. That sum of money is ascertained by inquiring "How much did the shareholders pay up in money or by other valuable consideration?" There is no reference in these words to the value of the assets (past or present) represented by that amount of money. The words contain no warrant for introducing by implication further words such as "so far as that capital is represented by assets still existing and employed in Australia for the purpose of gaining taxable profit." The whole paid up capital is to be taken into account, even if some or all of it has been lost.

In the case of par. (b), the effect of the section can be well illustrated by reference to the provision which includes "amounts standing to the credit of the Profit and Loss Account at the commencement of the accounting period." Here again the idea of the section is the ascertainment of an amount without any necessity of identifying assets as representing that amount. In a trading business a balance to the credit of profit and loss account is the result of taking into account receipts from sales of goods and other receipts, valuations of stock-in-trade at the beginning and end of the year, estimates of good debts, and deducting estimates of the value of bad debts, working expenses and other outgoings. The value of the trading assets of a company may be great and the balance to credit of profit and loss account may be small. It is only the balance which is taken into account, not the value of all or of some part of the assets by a valuation of which the balance is in part determined. No reference to assets is required in order to apply par. (b).

Similarly par. (c), referring to reserves, refers merely to the amount of reserves, whether or not those reserves can be identified with particular assets. Where a reserve is "used in the business" it would frequently be very difficult indeed to identify it with any particular asset.

In par. (d) a provision is included for the excess of real value of assets over the value as appearing in the accounts of the company. This is a specific provision which requires consideration of the value of an existing asset. This provision is made for the purpose of correcting figures appearing in the accounts of the company. It also is a provision directed to the ascertainment of the moneys which the shareholders have really put at risk in the business of the company. It is only by reason of the specific terms of this provision that it becomes necessary to refer to the assets represented by any particular figure in the accounts of the company, and it will be observed that it applies only where the value of an asset appears in the accounts of the company.

Paragraph (e) represents a calculated amount arrived at as a matter of arithmetic which could not be associated with any one asset rather than with any other asset.

The deductions for which s. 24 provides secure the result, as already stated, that assets out of Australia the income from which does not enter into taxable profit are excluded from "capital employed." It is this provision which, in my opinion, effectively works out the application of the definition of "capital employed" contained in s. 3.

Upon the view submitted for the Commissioner, either the value of assets employed out of Australia is deducted from the various sums ascertained under pars. (a) to (e), and then the value of those assets the income from which is not taken into account under the Income Tax Assessment Act must again be deducted under par. (ii) (which would involve a double deduction) or, alternatively, no effect can be given to par. (ii). In my opinion the words of s. 24 do not justify such an interpretation.

Paragraph (vi) provides for the deduction from the sum ascertained under pars. (a) to (e) of certain amounts allowed as deductions under s. 53A of the Income Tax Assessment Act (which must mean the Income Tax Assessment Act 1936-1944, because s. 53A was introduced by the Act No. 28 of 1944, notwithstanding the definition of in s. 3). These deductions are merely amounts allowed as deductions in an assessment to income tax. They cannot possibly be regarded as representing any assets.

Thus, in my opinion, s. 24 should be read as providing a means for ascertaining the capital employed in Australia and used in gaining or producing the taxable profits and it would be a mistake to apply s. 24 by making an inquiry in respect of each of the assets to which the financial figures of the company related whether those assets were or were not employed in Australia.

The view that s. 24 is directed to the ascertainment of an artificial figure upon which it is regarded as proper to impose a special tax rather than to the ascertainment of the capital which in the commercial sense is actually used in Australia in the business of the company is supported by consideration of s. 25. Section 25 (1) provides that: "Any company may apply to the Commissioner for an increase in the capital employed by it as ascertained under this Act, on the ground—(a) that the amount so ascertained does not represent the true capital employed by it in the business carried on by it".

This provision shows that the capital as ascertained under s. 24 may in some cases not represent the true capital employed by the company in the business. The words "capital employed" in the phrase "true capital employed" cannot be construed as meaning "capital employed" in the sense in which that term is defined in s. 3, because s. 25 (1) is based upon the fact that there may be a discrepancy between the "capital employed" as ascertained under the Act and "the true capital employed by the company in the business."

The first question submitted in the case stated asks whether, in ascertaining the capital employed, the Commissioner is entitled to deduct capital employed outside Australia in gaining or producing income if that income is taken into account in ascertaining income of the period under the Income Tax Assessment Act. In my opinion this question should be answered in the negative. Such a deduction is not warranted by pars. (i) to (vi) of s. 24 (1), and there is no other authority for making any deduction from the sum total of the amounts ascertained by the application of pars. (a) to (e) of that section.

Upon this view it is unnecessary to answer question No. 2.

Rich J.

The substantial question submitted in the case stated is similar to the controversy the subject of the decision of my brother Williams in Warner Bros. First National Pictures Pty. Ltd. v. Federal Commissioner of Taxation[2]. The solution of the question depends upon the construction of ss. 3 and 24 of the War-time (Company) Tax Assessment Act 1940-1944. In my opinion the definition of in s. 3 should be applied to and incorporated with ss. 19, 21, 23, 24 and 25, and I do not think that any sufficient intention to the contrary appears in the context. I therefore think that his Honour correctly construed s. 24 and accordingly I answer the first question in the affirmative. Applying this construction to the specific investments mentioned in question 2, I am of opinion that, with the exception of the investment in the Metropolitan Water, Sewerage and Drainage Board Dollar Bonds, the other investments mentioned do not constitute capital employed in Australia. The costs should be costs in the appeal.

Starke J.

Case stated pursuant to the War-time (Company) Tax Assessment Act 1940-1944. By that Act it is enacted that subject to s. 25 of the Act, which is immaterial to this case, the capital employed in an accounting period shall for the purposes of the Act be ascertained by adding various amounts and deducting therefrom other amounts. But s. 3 of the Act prescribes that unless the contrary intention appears "capital employed means the capital of a company employed in Australia or in a Territory of the Commonwealth in gaining or producing the taxable profit."

The question is whether the following securities or assets or any of them owned by the company—the taxpayer—described by the Commissioner as capital employed ex Australia were rightly excluded by the Commissioner in calculating the capital employed by the company for the purposes of the Act.

Commonwealth of Australia Stock registered in London6,968Metropolitan Water, Sewerage and Drainage Board Bonds (Dollar Bonds)3,294Australian Consolidated Bonds with—(i) Department of Insurance, Canada£27,924(ii) Siamese Legation, London12,782£40,706

These securities or assets have been deposited or lodged by the taxpayer with authorities or bodies outside Australia for the purposes of its business. The income, however, from these securities or assets is included in the assessable income of the taxpayer for the relevant year.

The company concedes that the definition of in s. 3 should be read into s. 24 as if it had been enacted in this form: Subject to s. 25 of this Act the capital employed in any accounting period, meaning the capital of a company employed in Australia or in a Territory of the Commonwealth in gaining or producing the taxable profit, shall, for the purposes of this Act, be ascertained by adding the following amounts ... and deducting therefrom certain other amounts.

It then contends that this direction is imperative and exhaustive and that the direction is in no wise affected by the provisions of ss. 19, 21 or any other section. But it is a direction that the capital employed, as that term is defined in s. 3, shall be ascertained in the manner prescribed by s. 24. Nothing is prescribed in the section as to capital that is not so employed and no provision is made for including it in the capital, the amount of which is to be ascertained in the manner directed by s. 24.

Accordingly the first question stated in the case should be answered in the affirmative.

The second question is directed towards the particular securities or assets already mentioned. The securities are all Australian securities. According to the cases the general rule is that securities, such as bonds, promissory notes, and bills of exchange which are transferable by delivery only and the debts or moneys secured thereby are situated in the place where they happen to be and that stocks or shares, transferable only by registration, are situated, not in the place where the certificates happen to be, but in the country where registration must be effected, i.e. generally, in the country where the company is incorporated (See Cheshire on Private International Law, 2nd ed. (1938), pp. 503-504; Dicey's Conflict of Laws, 4th ed. (1927), pp. 345-347, note (1)).

The War-time (Company) Tax Assessment Act however speaks of "capital employed in Australia" but the rules governing the situation of property of the nature already mentioned are useful aids for determining where capital is employed that is invested in such securities.

This stock is, I take it, subject to the provisions of the Commonwealth Inscribed Stock Act 1911-1945. It is registered and is transferable in London.

The stock certificate has been deposited pursuant to the provisions of the Assurance Companies Act 1909 Imp.. The appellant is thus enabled to carry on insurance business in the United Kingdom. The stock carries interest which is collected by the appellant and included in the appellant's income assessed to Federal income tax for the financial year 1943-1944.

The proper conclusion on these facts is that the principal moneys secured by this stock are not employed in Australia or in a Territory of the Commonwealth in gaining or producing taxable profit.

These bonds were issued, I take it, pursuant to the Commonwealth Debt Conversion Act 1931 or the Commonwealth Inscribed Stock Act 1911-1945. They are transferable by delivery (See Commonwealth Debt Conversion Act 1931, s. 5; Commonwealth Inscribed Stock Act 1911-1945, s. 51C; Treasury Bills Act 1914-1940, s. 5).

The bonds were acquired in Australia but were transmitted to Canada or to London and lodged in Canada and London respectively to enable the appellant to carry on its business in Canada and in Thailand. The bonds carry interest which is collected by the appellant and included in the appellant's income assessed to Federal income tax for the financial year 1943-1944.

The proper conclusion on these facts is that the principal moneys secured by these bonds are not employed in Australia or in a Territory of the Commonwealth in gaining or producing taxable profit.

These bonds were issued by the Metropolitan Water, Sewerage and Drainage Board constituted under the Metropolitan Water, Sewerage and Drainage Act 1924-1944, of New South Wales.

They were issued in New York, United States of America, and purchased by the appellant in Canada and are held by the appellant in Sydney, New South Wales, where it collects the interest payable on the moneys secured by the bonds. The interest so collected is included in the appellant's income assessed to Federal income tax for the financial year 1943-1944.

The proper conclusion on these facts is that the principal moneys secured by these bonds are employed in Australia in gaining or producing taxable profit.

Therefore the questions stated in the case should be answered:—

Dixon J.

The taxpayer is a company which falls within the definition of "resident of Australia" contained in s. 6 of the Income Tax Assessment Act 1936-1945. The taxable income of the company is, therefore, ascertained in accordance with s. 25 (1) (a) of that Act which provides that the assessable income of a resident shall include the gross income derived directly or indirectly from all sources whether in or out of Australia. If, however, income derived from sources out of Australia is not exempt from income tax in the country where it is derived, then under s. 23 (q) it is exempt from tax in Australia and is accordingly excluded from the assessable income.

Section 13 of the War-time (Company) Tax Assessment Act 1940-1944 imposes war-time (company) tax upon the amount by which the taxable profit derived by a company during a relevant accounting period exceeds the percentage standard. "Taxable profit" means the amount remaining after deducting from the taxable income of the accounting period as assessed for income tax certain items of expenditure or of income not material to the decision of this case: s. 3. The company derives from some assets out of Australia, and from other assets which the Commissioner claims are out of Australia, amounts of assessable income which are exempt from income tax in the countries where they are derived and are, therefore, not excluded from the taxable or assessable income under s. 23 (q) of the Income Tax Assessment Act.

The company has been assessed for war-time (company) tax for the financial year beginning 1st July 1943 upon the taxable profit derived during an accounting period ended 31st March 1943, which apparently is the accounting period adopted in lieu of the twelve months immediately preceding the year of tax.

In arriving at the taxable profit the percentage standard was, of course, subtracted from the taxable income; but the taxable income from which it was subtracted was arrived at from assessable income which, as already stated, included amounts of income that are or are claimed to be from an extra-territorial source. The percentage standard was calculated upon the capital employed during the accounting period, as s. 19 directs. But, in ascertaining the capital employed during the accounting period, the Commissioner excluded the assets from which the income said to be extra-territorial was derived. He did so on the ground that the definition contained in s. 3 of required him to do so. The expression is defined to mean the capital of a company employed in Australia or in a Territory of the Commonwealth in gaining or producing the taxable profit. As the assets in question, although employed in producing part of the taxable profit, were not employed in Australia, they were shut out from the computation of capital upon which the percentage standard is calculated. The company complains that to exclude the asset from the capital account upon which the percentage of profit allowed is calculated and, at the same time, to include the income derived therefrom in the income account and so swell the taxable profit, is illogical and unjust. The company contends that it is not a course which the Act, properly construed, necessitates. How the capital employed in an accounting period is to be ascertained is the subject of specific statutory directions. Speaking broadly, the object of the directions is to find what are the funds invested in the business, excepting capital the income from which is not taken into account in assessing income tax. To this end the paid up share capital, the reserves and the accumulated profits and amounts at the credit of the last profit and loss account are to be aggregated to form a base. The accumulated profits and the sum at credit of profit and loss are, however, to be adjusted so that they represent profits computed according to the conceptions of the income tax law with reference to depreciation and to the valuation of trading stock. All this is provided for in detail by s. 24. The material part of the opening words of that section are: "the capital employed in any accounting period shall, for the purposes of this Act, be ascertained by adding the following amounts, namely"; then are set out the categories I have mentioned, paid up capital, accumulated profits including amounts at credit of profit and loss, reserves and the amounts, minus or plus, to adjust depreciation &c.

On the side of the taxpayer it is said that this is an exhaustive statement of what constitutes "the capital employed" and that there is no room for the qualification contained in the definition restricting the expression to capital in Australia and the Territories; such a territorial restriction is incongruous with the conception of share capital and other "funds" invested in the business.

On the other side it is said for the Commissioner that the definition expresses a territorial limitation, that there is no context to displace it, and that, if the definition does not apply here, it cannot apply in the other provisions where the expression is used, viz. ss. 19, 21, 23 and 25.

In support of the taxpayer's view it is pointed out that you may substitute the definition for the expression "capital employed" in s. 24 and yet produce no greater result literally than the same exhaustive catalogue or description of what the words of the definition comprise. The suggestion is that when the words I have quoted from s. 24 (1) are replaced by the definition, the sub-section operates just as it did before the introduction of the limitation expressed by the words "employed in Australia or in a Territory"; it operates as a direction to ascertain "capital employed in Australia or in a Territory of the Commonwealth" by taking the list of "funds" which follow and by adding them together without regard to any question whether the assets which represent the "funds" are or are not employed in Australia or indeed whether assets representing them exist.

I am unable to agree in this suggestion. I think that, once the words "in Australia or in a Territory" are imported into the leading words of s. 24 (1), they inevitably imply a qualification on what follows. They imply that the "funds" enumerated are to be taken into account only in so far as they are employed in Australia or a Territory. The real question is whether any sufficient contrary intention appears in the context or subject matter to exclude the application of the definition. I think that a contrary intention does not sufficiently appear. I recognize that there is something foreign to the conception of "capital" embodied in s. 24 (1) in an inquiry into the situation of tangible or intangible assets. I recognize, too, that the purpose of such an inquiry may be challenged. For par. (ii) of sub-s. (1) of s. 24 positively excludes capital which is not or would not be taken into account in assessing the income of the accounting period under the Income Tax Assessment Act, and that is enough to exclude, in the case of non-residents, all assets employed abroad and, in the case of residents, all assets employed abroad the income of which is taxed abroad. The exclusion is worked out under par. (ii) simply by deducting the value of the asset from the account.

But, notwithstanding these considerations, I cannot escape the conclusion that the draftsman of the definition of "capital employed" meant that the territorial limitation should operate in s. 24. To say that it would have been wiser or more just or more logical or more symmetrical if he had not imposed a territorial restriction is not enough. The fact is that a scrutiny of the Act shows that the definition can have no application if it is excluded from s. 19 and, unless its application is excluded from s. 19, there is neither point in, nor reason for, excluding it from s. 24. The material part of s. 19 provides that the percentage standard shall be an amount equal to the statutory percentage of the capital employed. It seems to me impossible to find adequate grounds for refusing to apply the definition and for refusing to read the provision as meaning that the percentage standard shall be an amount equal to the statutory percentage of the capital of the company employed in Australia or a Territory of the Commonwealth in gaining or producing the taxable profit. When it is so read the words would control territorially the capital ascertained under s. 24 (1), even if the territorial restriction were not introduced into that sub-section by applying the definition. But the fact is that the draftsman considered that a territorial restriction was necessary and, however mistaken he may have been, I think that his intention is clear enough that it should apply in ss. 19, 21, 23, 24 and 25.

The practical difficulties of applying the territorial restriction to s. 24 (1) do not appear to me to be insuperable. After all, the categories covered by pars. (a), (b) and (c) of s. 24 (1) cover the "funds" of a company, though indicated by descriptions usually found on the liabilities side of a balance sheet. It ought not to be difficult to say to what extent the funds of a company have been committed to an Australian enterprise or undertaking. As a practical test there cannot often be much wrong in doing so by deducting the value of the assets which are known to be employed abroad.

In my opinion the interpretation placed upon s. 19 and s. 24 by Williams J. in Warner Bros. First National Pictures Pty. Ltd. v. Federal Commissioner of Taxation[3] is correct.

My conclusion is that, in ascertaining for the purposes of the War-time (Company) Tax Assessment Act the capital employed by the taxpayer company in an accounting period, the Commissioner is entitled to deduct capital employed outside Australia in gaining or producing income which is taken into account in assessing the income of the accounting period under the Income Tax Assessment Act.

It thus becomes necessary to consider so much as the taxpayer disputes of the Commissioner's claim that certain of the company's investments do not constitute capital employed in Australia. The company carries on various classes of insurance business, other than life insurance, in Australia and elsewhere. It invests in government securities and apparently when occasion requires it uses them for the purpose of depositing or charging funds with governments abroad as a condition of carrying on business in the country where the deposit is made.

There are four contested claims made by the Commissioner that government securities represent capital employed abroad. They are submitted for our decision by the second question of the case stated.

I think that the second question should be answered that the capital represented by the Metropolitan Water, Sewerage and Drainage Board Dollar Bonds constitute capital of the taxpayer company employed in Australia, but that the other securities mentioned in the question do not.

As I have already said, in effect, I think that the first question should be answered in the affirmative.

The costs of the case stated should be costs in the appeal.

McTiernan J.

I agree with the answers which my brother Dixon proposes to the questions in this case, and his Honour's reasons for those answers respectively.

Questions answered as follows:—(1) Yes; (2) The capital represented by the Metropolitan Water, Sewerage and Drainage securities is capital of the appellant company employed in Australia. The capital represented by the other securities mentioned in the question is not such capital. Costs of case to be costs in the appeal. Case remitted to Rich J.

Solicitors for the appellant, Stephen, Jaques & Stephen.

Solicitor for the respondent, G. A. Watson, Acting Crown Solicitor for the Commonwealth.