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

Section 10 (1) of the Income Tax Assessment Acts 1915 reads:

Subject to the provisions of this 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 . . .

There are some Australian-owned businesses which send travellers to New Zealand or other places beyond Australia.

The travellers sometimes take orders; at other times influence orders. In some cases the Australian businesses do not send travellers but send catalogues of their goods and receive orders from persons outside Australia based on the catalogues.

In every instance the orders reach Australia and the goods are shipped from Australia in response to the orders.

In some cases the goods are invoiced to the purchaser at prices f.o.b. at port of export in Australia. In others the vendor charges a price delivered to the purchaser.

The question for decision is whether the income from these sales arises from sources within or without Australia.

I am not clear as to the extent to which the decision on this question depends upon the law relating to contracts for and delivery of goods.

In some cases actual contracts for the sale and purchase of the goods are made outside Australia by the representatives of the Australian houses.

In other cases there is no contract made outside Australia. The customer merely sends an order to the Australian house which executes it.

This is precisely the position in the case of Australian houses sending orders to English merchants for the goods.

I take the view that under section 10, the profit derived from the customers outside Australia is not taxable, but before definitely adopting this rule, I shall be glad of your advice as to the extent to which the question is affected by the law relating to contracts for and delivery of goods.

Section 10 (1) of the Income Tax Assessment Act provides that income tax shall be levied on income derived from sources in Australia.

Section 14 (a) of the Act provides that income shall include profits derived from any trade or business. If a trade or business is carried on in Australia the profits arising from that trade or business are taxable, the trade being regarded as the source of the income.

The question then arises whether the sale of goods or collecting of orders outside Australia by or on behalf of a person resident in Australia constitutes for income tax purposes part of the business carried on by the person resident in Australia.

It has been established by a long line of cases that where 'the conduct and management, the head and brain' of the business abide, there (though not necessarily there alone) the business is carried on (see San Paulo (Brazilian) Railway Co. v. Carter [1896] A.C. 31, Cesena Sulphur Co. v. Nicholson 1 Ex.D.428, Calcutta Jute Mills Co. v. Nicholson 1 Ex.D.437, London Bank of Mexico and South America

v. Apthorpe [1891] 2 Q.B.378).

In the case of the London Bank of Mexico and South America the bank carried on the business of bankers in London, City of Mexico and Lima, and the question arose as to what profits of the bank were taxable in England. Lord Esher in delivering judgment said:

In the present case the bank does not carry on two businesses. It is untrue to say that the business which they carry on is carried on in Mexico. They have only one business, which they carry on in England. It is true that part of the profits of that business carried on in England is earned by means of transactions abroad, but that is not carrying on the business abroad; it is carrying on the business in England by means of some transactions of it which are carried out abroad; but those transactions are carried out subject to the directions and at the will and pleasure of the masters and owners, resident in London, of that business.

The operations carried on by the taxpayer in Australia and abroad constitute one business and the profits arising out of those operations are the profits of a business carried on in Australia, if the central control and management of the business is in Australia.

The total profits being profits of a business carried on in Australia would be taxable, unless there is anything in the Act to limit the taxation to such of the profits as arise from transactions in Australia.

In section 18 (1) (a) of the Act it is provided that the deductions for outgoings and expenses in the production of income are limited to outgoings and expenses actually incurred in Australia.

Outgoings and expenses incurred outside Australia cannot under the Act be deducted.

As these latter expenses are not to be deducted I do not think that profits arising from transactions outside Australia, in which those outgoings and expenses were incurred, can be included as part of the income liable to taxation under the Act.

In the case of Commissioner of Taxes v. Kauri Timber Company 24 N.Z.L.R. 18, where a timber company registered in Victoria carried on business in Victoria, New South Wales and New Zealand, Stout C.J. said:

It was contended that, as the kauri timber came from New Zealand, the income derived from its treatment outside New Zealand was covered by sections 51 and 59. If this is so, it seems clear that the outgoings necessary to earn this income cannot be deducted. (Subsection 2 of section 66.) The company must incur considerable expense in treating the kauri in Australia by sawing it, planing it, etc.: can it be that the income from such woodware-factories where such work is done can be claimed in the assessment of the income, and yet the expenses to earn the income not be deducted?

Before, however, coming to the conclusion that the Legislature meant to impose taxation of this kind, the words of the law must be clear and precise.

Reading sections 10, 14 and 18 together, I can find no words which would indicate in clear and precise language that the legislature intended to tax profits arising from transactions abroad and yet not allow the expenses incurred in producing that income to be deducted.

The fact that the expenses abroad were not to be deducted appears to me to show that the legislature did not intend to tax the profits of a business arising from transactions abroad.

In my opinion, the profits of a business in section 14 of the Act mean the profits arising from transactions within Australia.

A distinction is necessary between transactions within Australia and transactions without Australia. Where the traveller merely influences business or takes orders from customers without the power of making a binding contract, then there is no business carried on in the places which the traveller has visited, and the transactions of the business are, in my opinion, transactions within Australia (see Grainger & Son v. Gough [1896] A.C.325); where the owner of the business sends catalogues outside Australia and orders are received on those catalogues, in my opinion, these transactions are transactions within Australia.⁽¹⁾

If, however, a trader consigns goods to its agents outside Australia for sale, and sends a traveller outside Australia with power to make contracts for the sale of goods, then the trader carries on a business where the agent disposes of the goods or where the traveller makes the contracts, and, in my opinion, the transactions are transactions outside Australia (see Pommery and Greno v. Apthorpe 56 L.J.Q.B. 155, Erichsen v. Last 8 Q.B.D. 414, Werle & Co. v. Colquhoun 20 Q.B.D.753).

[Vol. 15, p. 40]

(1)In the Opinion Book this paragraph is somewhat garbled; it has been reconstructed to make sense.