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

Discussions have taken place with the legal representatives of companies who pay dividends or interest to absentee shareholders or depositors, as to the liability of the companies to be taxed as agent for such persons and as to the personal liability of the companies under section 52 (f) of the Income Tax Assessment Act 1915.

It is contended by Mr Nankivell (Malleson, Stewart and Nankivell, Solicitors, Melbourne) on behalf of the associated banks, that as regards those absentee shareholders or depositors whose names, as shareholders, are on the English register, or whose deposits are not in Australia, there is no power to the bank to deduct anything from the dividend or from the interest.

He further contends that unless and until the shareholder or depositor instructs the bank to either pay the dividend or interest to the current account of the shareholder or depositor or to hold it on his account or deal with it in some other way, the bank has not received any income in a representative capacity on behalf of the shareholders or depositor and therefore section 52 cannot apply to him.

Mr Nankivell's contention is that until that time arrives the company is merely a debtor to the shareholder or depositor when the dividend or interest became payable, and that if the bank went insolvent the shareholder or depositor would rank as ordinary creditors on whose account no special fund had been held which would be payable to them in full.

I understand that in the case of one bank the shareholders and depositors, with very few exceptions, have their dividends or interest paid to their current accounts. It is thought this practice exists in the case of some other banks.

In view of the legal difficulties surrounding this question, I have arranged that the Department shall not hold the banks personally liable pending the settlement of their exact position under the law.

The matter is of great importance and urgency, and in view of these facts, I shall be glad if you will favour me with your opinion on the legal question raised as early as possible.

As regards the first point, which relates to the liabilities of shareholders on an English register or depositors whose deposits are made in England, if the shareholders hold shares in a company which derives income from sources in Australia, then the income derived by the shareholder on his shares is taxable income (see section 14 (b) of the Income Tax Assessment Act 1915).

The fact that the shareholder's name is on the English register would not prevent section 14 (b) from applying to the income derived from the shares.

In the case of depositors whose deposits are made in England, I do not think that the interest on the deposits is derived from a source in Australia. The source of the interest is the contract of deposit, and the deposit being made in England, the income is not, in my opinion, derived from a source in Australia.

As regards the second point, which relates to the liability of a bank as agent for its absentee shareholders, I think the contention put forward by Mr Nankivell is correct.

Under section 52 the bank is only liable in respect of income received in its representative capacity. Until the money is actually received by the shareholder or the bank, or is dealt with by the bank according to his instructions it is not income within the meaning of section 52, notwithstanding that the bank has been appointed agent.

In my opinion, where the bank is appointed agent for the absentee shareholders, the bank is not liable under section 52 of the Act, until the amount of the dividend or interest has been paid to the credit of the shareholder's account.

[Vol. 15, p. 191]