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

Section 18 (1) (i) of the Income Tax Assessment Act 1915 provides for the allowance of 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, and for the allowance of the total amount paid in calls in the case of a mining company.

A case has arisen where a taxpayer claims 5% of calls paid by him under the following circumstances:

Being the holder of debentures to the value of £2,500 which carried the right to convert the principal sum into shares, the taxpayer exercised his right when the debentures became due and took up 2,500 £1 shares, and the company applied the redemption proceeds of the debentures to the purchase of the shares. Five per cent of the £2,500 is claimed by the taxpayer as representing calls.

The transaction was regarded by the Department as meaning a transfer of capital from one class of security to another and the claim was disallowed.

In support of this view I was guided by the following facts:

In the Accountants' Compendium 'calls' are defined as: 'Instalments of the share capital, or debentures of a joint stock company which the members or holders are from time to time called upon to pay'.

They are also defined as 'instalments due on shares not fully paid, payable in accordance with the terms of the prospectus or articles of association of a company'.

In the present case the taxpayer was not called upon to pay one penny-the transaction being merely a transfer of £2,500 from one class of security to another. When issuing the shares the company did not make a 'call'.

In my view the deduction allowable under the section is confined to a general call made by a company in terms of its articles of association for payment of a further instalment of purchase money unpaid on shares on which application and allotment money has been paid.

Messrs Cullen-Ward, Accountants of Sydney, have now written me as follows:

We wrote on 16 October 1915 a long letter to Messrs Norton Smith & Co., Solicitors, who are recognised as the soundest authorities in Sydney on taxation matters, submitting certain questions-among others the following: Section 18 (i): Where a company declared a bonus during 1914-1915 to enable shareholders to take up new shares, can 5% of the call paid be deducted or does this deduction apply only to calls on contributing shares?

Replying on 19 October 1915, Messrs Norton Smith & Company said:

The right to these deductions (section 18 (i)) is not restricted to calls upon shares which have produced or are deemed capable of producing taxable income. Neither is it restricted to calls provided out of the taxpayer's other resources. Therefore if a company pays a bonus to enable its shareholders to take up new shares and the bonus is so applied, 5% of the calls so paid may be deducted in arriving at the taxable income of the shareholder.

The right to these deductions also attaches to calls upon shares in companies whose central control and management are situated abroad, and whose dividends are outside the area of taxation.

From this we conclude that calls on shares of any nature whatever fall within the section.

We do not quite follow the intention of the legislature in regard to this deduction or its object but that the clause was too wide was realised by you and the amendment in Act No. 47 of 1915 limited the deduction to the calls in companies carrying on operations in Australia-but the amendment does not otherwise restrict or limit the nature of the call.

May we further point out:

The underlying principle of the Companies Act is that all shares must be paid for in cash. Now a call is a call whether it is at the rate of 2s 6d per month, or a single call of 20s a share. If a company actually hands a shareholder cash for a debenture fallen due or for a bonus dividend and a week later invites the shareholder to apply for additional shares-payable in full on allotment-the principle is the same as when a shareholder instructs the company to apply the money due to him as above in payment for the additional shares. It must not be forgotten that the shareholder can elect to take the dividend or bonus in cash and also refuse or neglect to apply for the additional shares. On what grounds can it be argued that a call of the full amount due is not a call within the meaning of the Act? You desire to administer the Act in like fairness to the Treasury and to the taxpayer, and our aim is to protect our clients and claim for them all the deductions provided for in the Act.

I shall be glad to learn whether in your opinion the contention of the writers is supported by the law. In another case application and allotment money has been claimed as coming within the definition of 'calls' on the ground that no matter how the money is paid up the shareholder expects to receive the whole amount subscribed in the form of dividends, and as such he will be taxed on those dividends. The claim in this case amounts to £6045.

It will be understood that claims of this nature will, if admitted, greatly reduce the revenue.

The question at issue turns upon what constitutes a call. The Act has given no definition, but if a payment is a call, then, in the case of companies other than mining companies, the taxpayer is entitled to a deduction of 5% on the payment made.

It is contended on behalf of the taxpayer that any payment to a company in taking up shares is a call, whether the payment covers the full value of the share or not.

According to Wharton's Law Lexicon 'calls' are instalments by which the capital of a company is gradually paid up.

Stroud's Judicial Dictionary states that instalments by which a share is payable are not calls, and in support of that statement, cites a judgment of Kelly C.B. in Hubbersty v. Manchester, Sheffield & Lincolnshire Railway Co. 36 L.J.Q.B. 198.

The words of Kelly C.B. hardly support the view put forward by Stroud, but appear merely to be a statement by that Judge, that, in his opinion, the payment in full for a share, which is allotted to a person, is not the payment of a call.

With these words of Kelly C.B. I am inclined to agree.

'Call' in essence seems to signify that it is something which a shareholder of a company is required to do by the company or its directors.

The shareholder is given no option in the matter, and if he fails to comply with the directions of the directors, he may be sued for the money which he is required to pay.

But, to my mind, it is stretching the word beyond its proper meaning to apply it to the case of a person who in the exercise of a right conferred upon him, takes up shares and pays for them in full at the time he takes them up.

He is not called upon to do anything. He merely exercises a right which has been conferred upon him.

The solicitors for the taxpayer contend that 'a call is a call whether it is at the rate of 2s 6d per month, or a single call of 20s a share'.

This appears to me to beg the question, as the whole point at issue is whether a single payment of 20s a share is a call. Whether the company invites a shareholder, after paying him cash, to return the money for new shares, or whether the shareholder instructs the company to return the money to pay for the shares is immaterial.

In either case, the shareholder had a full and free option, and was in no way required by the company to return the money, or to instruct the company to keep the money in payment of the shares.

In the first case set out in the Commissioner's memorandum, the shareholder, on his debentures falling due, exercised a right which had been conferred on him, of taking shares to the value of the debentures, and instructed the company to apply the redemption proceeds to the purchase of the shares.

The shareholder here merely exercised an option and right which he had, and, in my opinion, the payment of the purchase money for the shares was not the payment of a call.

As regards the payment of application and allotment money, it is to be noted that the section refers to 'calls on the shares of a company', which have been paid by the taxpayer.

Until he has paid the application and allotment money the shareholder is not entitled to receive the shares, and he cannot pay calls on shares until the shares have become his to deal with.

The section appears to imply that, until a person has shares, he cannot pay calls on them, and until he pays the application and instalment money, he has not got the shares.

This reading of the section would also apply to the question as to whether payment in full for shares constitutes a call. When he gets the shares, as they have been fully paid for, there can be no calls on them.

In my opinion, the payment of application and allotment money on shares is not the payment of a call.

[Vol. 15, p. 142]