The Commissioner of Taxation has forwarded the following memorandum for advice:

Section 18 (i) of the Income Tax Assessment Act 1915 allows as a deduction from income five per centum of the total amount paid in the year in which the income is derived in respect of calls on the shares of a company, provided that the total amount of calls paid in the year in which the income is derived shall be deducted in the case of calls on shares in a mining company.

There are cases of mining companies, with registered offices in Australia, whose operations are conducted outside Australia, and the question has been raised as to whether calls paid on shares held therein may be deducted from income.

In my view, unless the mining company or its dividends are taxable in the Commonwealth, deductions for calls should not equitably be allowed. As, however, the language of the section is broad, and is prima facie capable of application to all calls on mining shares, I should be glad of your advice.

Section 10 (1) of the Income Tax Assessment Act 1915 provides that subject to the provisions of the Act, income tax shall be levied and paid in and for each financial year upon the taxable income derived directly or indirectly by every taxpayer from sources within Australia.

By section 14 (b) of the Act it is provided (inter alia) that the income of a person includes dividends, interests, profits or bonus credited or paid to a member of a company. Then by section 18 it is provided that in calculating the taxable income of a taxpayer the total income derived from all sources in Australia is to be taken as the basis, and from it there is to be deducted (inter alia) the total amount of calls paid in any year on shares in a mining company.

Reading these three sections together, I think it is clear that Parliament intended that the inclusion of dividends and the deduction of calls should be reciprocal. The word 'company' without any limitation is used in both cases but both the inclusion of the dividend as part of the income and the deduction of the calls are prefaced by the words which limit the income to that derived from sources within Australia.

In my opinion, calls on shares in a company can only be deducted in cases where the dividend received from the ownership of those shares is derived from a source within Australia within the meaning of the Income Tax Assessment Act 1915.

The question of when a dividend is to be considered as being derived from a source within a State was dealt with by the Supreme Court of New South Wales in the case of In re Chalmers 13 S.R. (N.S.W.) 711. In that case the Court held that the source of the income of a shareholder in a limited corporation is the ownership of the share, the locality of which is where the central control and management of the company is situated, and not the participation in carrying on the business of the company, and therefore-

1. where a company incorporated under English law, with its registered office in England, carries on business in New South Wales, the shareholders resident in that State, and whose names are on the branch register of members kept by the company in that State, are not liable to pay income tax in respect of dividends on their shares, and
2. where a company incorporated in New South Wales, with its head office in that State, carries on business in that State and elsewhere, the shareholders are liable to pay income tax in respect of the whole of the dividends paid in respect of their shares in the company.

This case lays down the principle that the source of a dividend is the ownership of the share in respect of which the dividend is paid and that the share is a source of income within a State when the central control and management of the company are within the State (see also De Beers Consolidated Mines Ltd v. Howe [1906] A.C.455).

The question whether the central control and management of a company is within Australia is a question of fact which must be determined by the Commissioner. If the central control and management are situated within Australia, then the shares are a source within Australia from which income is derived within the meaning of the Income Tax Assessment Act 1915 irrespective of the locality of the operations of the company.

It should be noted that the views set forth in this opinion with regard to the source of income deal only with the dividend in the hands of the shareholders, but do not deal with the question of the source of the income of the company itself.

[Vol. 14, p. 100]