ABSTRACT
Taxation is an indispensable right of the state over its citizens. This paper will discuss the interpretation of the judicial branch and the government of the particular provision of taxation. This will also present the cases where the court laid down its interpretation on the said provision.
AUSTRALIAN TAXATION SYSTEM
Taxation has been recognized as a right of the state to enforce upon its citizen’s income, properties, business and others. I t is an essential function of the government in order that the state may live. Moreover, it is the means whereby the government’s services and public facilities are made available to the people.
In Australian Taxation System, citizens are required to pay taxes and other charges at federal, state, territory and local government levels in order to fund a range of government programs and community services (Australian,gov, 2008). It also uses the individual “self- assessment” principle in its taxing system (Australian,gov, 2008). In addition, the Commonwealth Income Tax Assessment Act 1936-1941 has been enacted as a guide in assessing the taxable income of its citizens ([1944] HCA 18; 69 CLR 235). However, it has disputable provisions that is the subject of the cases at bar, McCauley v. Federal Commissioner of Taxation ([1944] HCA 18; 69 CLR 235) and Stanton v. Federal Commissioner of Taxation ([1955] HCA 56; 92 CLR 630).
In the first case, the court decided that the money being disputed was taxable being a royalty. Before going any further, it is good to discuss the case in brief. McCauley, who owns a certain land with growing trees, entered into an agreement with Thomas Laver whereby the latter would purchase the growing timber on the land of the former ([1944] HCA 18; 69 CLR 235). The agreement further stated that the McCauley agreed to sell to Laver the right to cut and remove the standing milling timber then growing on specified land at or for a price of royalty of three (3) shillings for each and every one hundred (100) superficial feet of such milling timber so cut ([1944] HCA 18; 69 CLR 235)4. The respondent and the Board of Review subjected to tax the money because they held that it is a royalty and thus, part of the appellant’s income as embodied in sec. 26 of the Commonwealth Income Tax Assessment Act 1936-1941 which states that “The assessable income of a taxpayer shall include, among others, any amount received as or by way of royalty” ([1944] HCA 18; 69 CLR 235). McCauley then appealed on the ground that his case is the same as the case of Thomson v. Deputy Federal Commissioner of Taxation ([929] HCA 18; 43 CLR 360) and Minister of National Revenue v. Spooner ([1933] AC 684) wherein in both cases, the court decided that the money were not considered as royalty. In the Thomson’s case, the taxpayer, who is engaged in selling timber, sold the growing timber in his land for a lump sum ([929] HCA 18; 43 CLR 360). The Commissioner, then, assessed the selling money for being an income from the taxpayer’s property. In the second case, the taxpayer sold on freehold her land to a company for a consideration of cash, share in the company and percentage of the oil products that may be drilled from her land ([1933] AC 684). The Commissioner also taxed the percentage from oil drilled for being considered as royalty. However, in both cases the court decided that money received by Thomson and Spooner were not royalty but merely a profit on the sale of their capital asset and therefore, cannot be taxed ([1944] HCA 18; 69 CLR 235).
In the second case at bar, Stanton v. Federal Commissioner of Taxation ([1955] HCA 56; 92 CLR 630), the taxpayer is a tenant to a piece of land which stood a quantity of pine timber and hardwood timber ([1955] HCA 56; 92 CLR 630). The taxpayer sold the timbers to a sawmiller in consideration of price wherein a part of which is payable quarterly. The Commissioner taxed part of the amount received by the appellant for being a royalty and included it as part of the appellant’s assessable income ([1955] HCA 56; 92 CLR 630). The court held that the money was not a royalty and therefore cannot be taxed.
In all the cases provided, the term “royalty” was the basis of the court in its decision and even confused the judges because the Act did not define the term and the term was commonly connected to the agreements for the use of patents or copyrights and in relation to minerals ([1944] HCA 18; 69 CLR 235). The court stated that;
In the case of patents, a royalty is usually a fixed sum paid in respect of each article manufactured under a license to manufacture a patented article. Similarly the publisher of a work may agree to pay the author royalties in respect of each copy of the work sold. In the case of mineral leases, a rent is reserved by the lease and frequently royalties are also made payable, being sums calculated in relation to the quantity of minerals gotten, in such case, royalties represent that part of the reddendum which is variable ([1944] HCA 18; 69 CLR 235).
However, in the cases provided, the court extended the meaning of royalty as it is also “used for the purpose of describing payment made by a person for the right to enter upon land for the purpose of cutting timber of which he becomes the owner, where those payments are made in relation to the quantity of timber cut or removed” ([1944] HCA 18; 69 CLR 235).
From all the cases cited, it is clear that they all have similarity on the fact that the taxpayers all entered into a contract whereby they sold the properties, trees, standing in their land for a price. It is only different in the case of Spooner because the landowner sold her land on a freehold to a company for drilling oil and the taxpayer has a share on the oil that can be drilled therefrom. Moreover, Stanton and Thomson were both engaged in selling timber while McCauley was not. Nevertheless, they were all engaged in a contract wherein the taxpayer receives money in consideration to the quantity of timber cut or removed from the land in pursuant to the right to do so ([1955] HCA 56; 92 CLR 630).
It can be derived from the case that the Commissioner is not careful in assessing what is taxable from not. It can also be concluded that the government applies the provision of the act in a general manner because it cannot distinguish the income receive as or by royalty from an income arising from principal asset of a taxpayer.
In the judicial interpretation, it can be concluded that the provision has also confused their mind because in fact, one judge has dissented from the majority decision. According to the dissenter, the timber that grew in the taxpayers lands were accidentally discovered and the need to sell arise from the effect of the war. He further asserted that agreement was one of sale and purchase and not lease and that the method of payment is from the nature of thing by installments which are not gains, profits or receipts of an income character which is contrary to the Commissioner’s claim that the receipts are of a capital nature ([1944] HCA 18; 69 CLR 235).
In addition, the court derived part of its decision on the form of the contract and not on the substance. In the case of McCauley, the agreement expressly stated that the money was a form or prize or royalty and the court undoubtedly constructed the phrase as it is.
In the case of McCauley, the agreement also provided that the payment be done monthly while in the case of Stanton, the payment was done quarterly after a first payment. From there the court decided that they differ and that paid monthly was considered royalty. Among the cases discussed, the cases are quite similar but were interpreted differently by the court while the government generally considered all as taxable.
If the cases be decided on the present time, the decision could have different. It has been said that the court will now see through the substance of the contract and not on its form because it could happen that the parties can be misled in their interpretation of the laws available and on the present jurisprudence. Furthermore, in the present setting, the definition of royalty no longer includes the amounts derived from the use of right or right to use, industrial, commercial or scientific equipment (this would include equipment leasing) (Blakedawson, 2008). In which case, the term royalty which has confused the taxing authority and the judiciary will be contained in the decision that has been provided by the Commission.
REFERENCES
Australian Government. (2008). Australian Taxation System. Retrieved May 18, 2008, from http://www.ato.gov.au/content/downloads/chap01.pdf
Australasian Legal Information Institute. (2008). McCauley v Federal Commissioner of Taxation [1944] HCA 18; (1944) 69 CLR 235. Retrieved May 18, 2008, from http://www.austlii.edu.au/au/cases/cth/HCA/1944/18.html
Australasian Legal Information Institute. (2008). Stanton v Federal Commissioner of Taxation [1955] HCA 56; (1955) 92 CLR 630. Retrieved May 18, 2008, from http://www.austlii.edu.au/au/cases/cth/HCA/1955/56.html
Blakedawson. (2008). Changes to the Australian/ South African Double Tax Agreement. Retrieved May 18, 2008, from http://www.blakedawson.com/Templates/Publications/x_article_content_page.aspx?id=50621&terms=royalty
