One of the innate powers of the state is taxation. Taxes paid by the citizens from their income or properties are used by government to provide the general public with free services and public facilities that they can enjoy. However, the taxation power of the state is not absolute as laws have been set as its guidelines. In the cases of McCauley and Stanton, the conflicting principle can be derived. It can be observed that the situations of the two appealants are quite the same but the Supreme Court decided differently. From these, it can be asserted that the Supreme Court was not quite careful of its decision.
On the part of the taxing authority or the Federal Commissioner of Taxation, it can be inferred that it has exercised its authority arbitrarily. Arbitrarily, because in all cases presented, the Commission assessed their money as taxable without regard to where the income is derived from. The dispute revolved around the interpretation of the royalty.
In McCauley v Federal Commission of Taxation the appellant sold the timber that had grow in his land without planting it to Laver. The agreement stated that the appellant agreed to sell to its purchaser the right to cut and remove the milling timber then growing on an specified land at a cost or royalty of three shillings for each and every one hundred superficial feet of such milling timber so cut. It can be observed that the agreement has expressly stated the received amount as royalty and it is where the court also based its decision for being a taxable income. In addition, the court considered the agreement as a sale of goods and not lease. Notably, royalty has been generally connected with patents and mined minerals. However, the court has extended the meaning of royalty to refer also to the value received by the landowner for the right sold to the purchaser to enter and cut the timber from the land of the former and acquires ownership of the timber. Moreover, it based its decision from the New Zealand’s statute wherein income from businesses or those removed or sold timber are taxed.
The appellant raised in defense the case of Thomson and Spooner. In Thomson v Deputy Federal Commissioner of Taxation appellant sold his timber for a lump sum and the value received was assessed by the Commissioner as part of income from a property. The Supreme Court adversely decided citing that it cannot tax the amount received from a sale of a capital asset.
In Minister of National Revenue v Spooner, respondent sold her land on a freehold to a company giving the latter right to drill the land for oil. In consideration of which, Spooner will receive cash, share in the company and a ten percent cut for every oil drilled. The Commission assessed the ten percent share of Spooner as taxable for being considered as income. However, the Court decided in the negative. It held that the disputed amount cannot be regarded as income received as or by way of royalty because royalties are payment made in instalment for the sold property. In the said case, Spooner’s ten percent is conditional because she could only receive it if the company would be able to drill oil.
Furthermore, the court held that the case of McCauley was different with the cases of Thomson and Spooner because the disputed income came from different sources. In the Thomson and Spooner, the amount they received were part of a capital income while in the case of McCauley, it was not.
In another case of Stanton v Federal Commissioner of Taxation, the Court did not consider the payment made to him as a royalty. In the said case, Stanton was a tenant and sold to a saw miller the pine timber and hardwood timber with the right to cut and remove the said timber. The fist payment was paid on a deposit while the rest was to be paid in instalment. Part of the amount received by Stanton was considered as a royalty and included also as an assessable income. Stanton disputed the Commission’s act and the court granted his petition. This case is similar with that of McCauley for being a contract of sale. Moreover, there was a contract to sell the right to remove and cut which is present in the case of McCauley. In addition, the payment was done in instalment. However, the court differentiated it with McCauley because in Stanton, the purchaser would only pay depending on the quantity of the removed or cut timber.
By analyzing the two cases, it can be inferred that the court has set a very slim differences in arriving in their decisions. The cases are undoubtedly similar but they just differ on the payment mode and on the source of the money received by them. It is quite confusing also because the meaning of royalty has not been described specifically by the law. Nothing in the cases can also be concluded as a technique to minimise their taxes.
If the cases would have been decided on this present year, the court could have arrived at a different decision. The assessment of income has now considered the royalty as income only within the ordinary meaning of it and not extending on the definition that the court has granted. The money received by McCauley could have not been considered as income because his income was just accidental and not in the course of his business. However, there would be no changes on the decisions made in the case of Stanton. Moreover, royalty has now been freed as an income because royalty derived from the use of right has now been excluded. Therefore, royalty has now been clearly defined.
- Australian Guide to Legal Citation: Second Edition (2002) University of Sydney Library <http://www.library.usyd.edu.au/libraries/law/abbreviations.html> at 24 May 2008.
- Changes to the Australian/South African Double Tax Agreement (2008) Blake Dawson <http://www.blakedawson.com/Templates/Publications/x_article_content_page.aspx? id=50621&terms=royalty> at 24 May 2008.
- Income Tax Assessment Act 1997 (2008) Australasian Legal Information Institute <http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/> at 24 May 2008.
- McCauley v Federal Commissioner of Taxation HCA 18; (1944) 69 CLR 235 (1944) Australasian Legal Information Institute <http://www.austlii.edu.au/au/cases/cth/HCA/1944/18.html> at 24 May 2008.
- Stanton v Federal Commissioner of Taxation HCA 56; (1955) 92 CLR 630 (1955) Australasian Legal Information Institute <http://www.austlii.edu.au/au/cases/cth/HCA/1955/56.html> at 24 May 2008.