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LINTER TEXTILES AUSTRALIA LTD (IN LIQ) v FC of T

Judges:
Hely J

Court:
Federal Court

MEDIA NEUTRAL CITATION: [2002] FCA 1089

Judgment date: 6 September 2002

Hely J

The applicant, Linter Textiles Australia Ltd (in liquidation) (``LTAL'') was, at all material times, a wholly owned subsidiary of Linter Group Ltd (in liquidation) (``LGL''). The ultimate holding company of LGL was Pochette Nominees Pty Ltd as trustee for the Goldberg Family (Deborah) Trust and the Goldberg Family (Faye) Trust. Each of these trusts was administered solely for the benefit of the Goldberg family.

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2. LGL was ordered to be wound up under the Companies (New South Wales) Code (``the Companies Code'') by the Supreme Court of NSW on 12 April 1991. LTAL was ordered to be wound up on 24 February 1992 under the Corporations Law 1992 (Cth) (``Corporations Law'' or ``CL''). In each case a liquidator was appointed to the company.

3. On 23 December 1999 the respondent (``the Commissioner'') issued a Notice of Assessment against LTAL under the Income Tax Assessment Act 1936 (Cth) (``the ITAA'') for the year ended 30 June 1992 (``the 1992 year''). The Commissioner assessed LTAL to income tax in the amount of $7,926,183.33, said to represent the tax payable on a net capital gain of $20,323,547 that the Commissioner claims accrued to LTAL in the 1992 year. That gain was said to arise from transactions which were implemented on 16 June 1987 which, for convenience, I will refer to as ``the debt defeasance transaction''.

4. LTAL objected to the assessment by a Notice of Objection lodged on 27 April 2000. The grounds of objection included assertions that:

  • - no asset was disposed of by LTAL that gave rise to an assessable gain; and
  • - if there was an assessable gain, in calculating the taxable income of LTAL for the 1992 year, the following losses should be taken into account:
    • • losses of $10,393,871, incurred by LTAL in the year of income ended 30 June 1990 (``the 1990 year''); and
    • • losses of $9,929,676 deemed to have been incurred by LTAL as a consequence of the transfer to it under s 80G of the ITAA of losses incurred by LGL in the 1990 year.

5. The Commissioner disallowed the objection. This is an appeal against the objection decision. During the course of the hearing of the appeal, the issues between the parties were narrowed as a result of agreement on the following matters:

  • - the amount of $10,163,773 only is assessable income arising from the debt defeasance transaction;
  • - that assessable income was derived in the 1992 year;
  • - but for the winding up orders made with respect to LGL and LTAL, the requirements of s 80A(1) or (3) and subsection 80G(6) are met; and
  • - the applicant does not rely on s 80E.

6. After the conclusion of argument in these proceedings I received further written submissions from both parties primarily directed towards the question of whether s 80A(3) is an alternative test to s 80A(1), or whether it is cumulative. Some submissions were also directed to s 80G(6). However, the parties reached an agreement that, subject to the impact (if any) of the winding up orders, the requirements of s 80A(1) or (3) are met, as are the requirements of s 80G(6). It has therefore become unnecessary for me to address any of the matters raised in the parties' further submissions.

7. The parties agreed that the determination of the appeal involves the resolution of the following questions:

  • - whether LGL ceased to be the beneficial owner (for the purposes of s 80A(1) of ITAA) of its shares in LTAL by reason of the making of the order for the winding up of LGL;
  • - whether, by virtue of the order for the winding up of LTAL, LGL's shares in LTAL ceased to carry any of the following rights within the meaning of s 80A(1) of ITAA:
    • • the right to exercise more than one-half of the voting power in LTAL;
    • • the right to receive more than one-half of any dividends that may be paid by LTAL;
    • • the right to receive more than one-half of any distribution of capital of LTAL;
  • - whether the making of winding up orders for LGL or LTAL operate so that the Commissioner could neither be satisfied of, nor consider it reasonable to assume, for the purposes of s 80A(3) of ITAA, any of the following:
    • • during the 1992 year, the voting power in LTAL was, either directly or through one or more interposed companies, trustees, or partnerships, controlled or capable of being controlled by a natural person or persons, who either directly or through one or more interposed companies, trustees or partnerships, controlled and was or were capable of

      ATC 4787

      controlling the voting power in LTAL during the 1990 year;
    • • the natural person or persons, who had between them in the 1992 year, a right to receive, directly or indirectly for his or their own benefit more than one-half of any dividends that might be paid by LTAL would, if LTAL had paid a dividend in the 1990 year, have had between them a right to receive, directly or indirectly for his or their own benefit more than one-half of any dividends that might be paid by LTAL;
    • • the natural person or persons, who had between them a right to receive, directly or indirectly for his or their own benefit more than one-half of any distribution of capital of LTAL; and
  • - whether the making of winding up orders for LGL or LTAL operate so that for the purposes of s 80G(6)(e) of the ITAA:
    • • LTAL thereby ceased to be a group company in relation to LGL within the meaning of s 80G(1) and (2) of the ITAA; or
    • • LGL was not able to satisfy in the 1992 year, the requirements of s 80G(6)(e)(ii) of the ITAA with respect to the loss it incurred in the 1990 year.

8. These questions are not stated as separate questions, nor are they necessarily distinct questions. The questions were formulated in order to assist in the identification of areas where the parties remain in dispute.

9. In substance, two issues arise. First, does the making of a winding up order in relation to the parent company (LGL) have the result that LGL ceases to be the beneficial owner of its assets, including the shares which it holds in LTAL? Second, does the making of a winding up order in relation to the subsidiary company (LTAL) have the result that LGL's status as a member of LTAL becomes that of a contributory, such that LGL's shares in LTAL cease to carry the rights referred to in s 80A(1)(c), (d) or (e)?

10. Sections 80A(1), 80A(2) and 80A(3) of the ITAA (as they applied in the 1992 year) provide as follows:

``80A(1) [Beneficial ownership of shares test] Notwithstanding sections 79E, 79F, 80, 80AAA and 80AA but subject to this section and sections 80B, 80DA and 80E, a loss incurred by a company in a year before the year of income shall not be taken into account for the purposes of section 79E, 79F, 80, 80AAA or 80AA unless-

  • (a) the company satisfies the Commissioner; or
  • (b) in the case of a company that is not a private company in relation to the year of income, the Commissioner considers that it is reasonable to assume,

that, at all times during the year of income, shares in the company carrying between them-

  • (c) the right to exercise more than one- half of the voting power in the company;
  • (d) the right to receive more than one- half of any dividends that may be paid by the company; and
  • (e) the right to receive more than one- half of any distribution of capital of the company,

were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying between them rights of those kinds.

80A(2) [Circumstances for tracing interests] Where-

  • (a) subsection (1) would, but for this subsection, apply for the purpose of determining whether a loss incurred by a company in a year before the year of income is to be taken into account for the purposes of section 79E, 79F, 80, 80AAA or 80AA;
  • (b) during the whole or any part of the year in which the loss was incurred, or during the whole or any part of the year of income, another company or other companies beneficially owned all or any of the shares in the first-mentioned company or an interest or interests in all or any of those shares; and
  • (c) the first-mentioned company requests the Commissioner at the time when it furnishes to him a return (or, if more than one return is furnished, the first return) of its income of the year of income, or within such further period as the Commissioner allows, that subsection (3) should apply for the purpose referred to in paragraph (a) or the Commissioner

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    considers it reasonable that that subsection should apply for that purpose,

then subsection (3) applies for that purpose in lieu of subsection (1).

80A(3) [Tracing of interests] Where, by virtue of subsection (2), this subsection applies for the purpose of determining whether a loss incurred by a company (in this subsection referred to as the `loss company') in a year before the year of income is to be taken into account for the purposes of section 79E, 79F, 80, 80AAA or 80AA, then, notwithstanding those sections but subject to subsection (5) and sections 80B, 80DA and 80E, that loss shall not be taken into account for the purposes of section 79E, 79F, 80, 80AAA or 80AA unless the Commissioner is satisfied, or considers that it is reasonable to assume, that-

  • (a) at all times during the year of income the voting power in the loss company was, either directly or through one or more interposed companies, trustees or partnerships, controlled, or capable of being controlled, by a person not being a company, or by 2 or more persons not being companies, who, either directly or through one or more interposed companies, trustees or partnerships, controlled, or was or were capable of controlling, the voting power in the loss company at all times during the year in which the loss was incurred;
  • (b) a person not being a company who had, or 2 or more persons not being companies who had between them, at all times during the year of income a right to receive, directly or indirectly, for his or their own benefit more than one-half of any dividends that might be paid by the loss company would, if the loss company had paid a dividend at any time during the year in which the loss was incurred, have had, or have had between them, as the case may be, a right to receive, directly or indirectly, for his or their own benefit more than one-half of that dividend; and
  • (c) a person not being a company who had, or 2 or more persons not being companies who had between them, at all times during the year of income a right to receive, directly or indirectly, for his or their own benefit more than one-half of any distribution of capital of the loss company would, if the loss company had made a distribution of capital at any time during the year in which the loss was incurred, have had, or have had between them, as the case may be, a right to receive, directly or indirectly, for his or their own benefit more than one-half of that distribution of capital.''

The effect of making a winding up order

11. The making of a winding up order has no immediate impact on the legal personality of a company, which remains in existence until it is dissolved:
Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB 592 at 606; McPherson The Law of Company Liquidation 4th Ed 1999 at p 218. Legal title to the assets of the company remains in the company notwithstanding the making of a winding up order. Unlike the position in bankruptcy, the company's assets do not vest in the liquidator unless a court makes an order to that effect (CL s 474(2)). The Company Law Review Act 1998 (Cth) introduced the concept of deregistration in the place of dissolution. Deregistration, like dissolution destroys the corporate existence of the company.

12. On the making of a winding up order control of the company's affairs is taken from the directors and vested in the liquidator, who may carry on the business of the company so far as is necessary for the beneficial disposal or winding up of that business: CL s 477(1)(a). The liquidator is given various powers, including the power to sell or otherwise dispose of the property of the company: CL s 477(2)(c); but the powers given to the liquidator are to do acts on behalf of the company:
In re Farrow's Bank Ltd [1921] 2 Ch 164 at 173, 174; McPherson (supra) at p 332.

13. On liquidation the company holds its property subject to the statutory scheme of liquidation, under which the liquidator is to realise assets, to pay creditors out of the proceeds of realisation of those assets and to distribute any surplus amongst members. Unsecured creditors and contributories have the benefit of the liquidator's administration of the company's estate, but they do not acquire any legal or equitable interest in any of the assets of the company: see Ford, Austin and Ramsay

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Ford's Principles of Corporations Law at [ 27.120].

14. The principle that a company's assets are to be distributed according to the statutory order laid down in the applicable company legislation is reinforced by the provision found in that legislation that, in general, a disposition of the property of the company made after the commencement of the winding up (other than a distribution by the liquidator) is void, unless the Court otherwise orders: CL s 468(1). Section 468(4) avoids any attachment, sequestration, distress or execution put in force against the property of the company after the commencement of the winding up. Nor can there be any transfer of shares, or change in the status of members, unless the Court otherwise orders: CL s 468(1). The principle is also reinforced by a provision that where a winding up order is made, civil proceedings against the company may not be instituted or proceeded with, except with the leave of the Court: CL s 471(2).

15. Liquidation has been described as a form of collective enforcement of debts to the benefit of the general body of creditors:
In re Lines Bros Ltd [1983] 1 Ch 1 at 14. The rights of creditors cease to be rights in personam (although their debts are not released prior to dissolution or deregistration); they are exchanged for rights against a fund which is administered by the liquidator for the benefit of the creditors who are entitled to prove against the fund:
FC of T v Macquarie Health Corporation Limited & Ors (1999) 17 ACLC 171 at 188.

16. It is not an inevitable consequence of the making of a winding up order that the company will be dissolved, or, since 1998, deregistered. The Court may at any time during the winding up make an order staying the winding up either indefinitely or for a limited time, or terminating the winding up on a specified day: CL s 482(1). Where an order is made terminating the winding up, directions may be given with a view to restoring management and control of the company to its officers. It was accepted by counsel for the Commissioner that if an order staying or terminating the winding up were made, the company would thereupon resume beneficial ownership of its assets.

Carry forward tax losses

17. The ITAA allows for losses to be carried forward, and to be offset against income derived in a subsequent year: ITAA s 79E. The entitlement to carry forward losses is subject to limitations and conditions which have changed from time to time. Different conditions have applied where the taxpayer is a private company or a public company from those which are applicable where the taxpayer is an individual.

18. Thus s 80(4) of the ITAA (cf s 79E(8)) provided that if, prior to a year of income, a taxpayer became bankrupt, or was released from his debts by the operation of the Bankruptcy Act 1966 (Cth), then no loss incurred by the taxpayer before his bankruptcy is an allowable deduction. There is no corresponding provision in relation to companies which are placed into liquidation. An explanatory note circulated by the Treasurer in relation to the Income Tax Assessment Bill 1944 (Cth) (``the 1944 Bill'') stated, in relation to subsection (4) of s 80:

``This sub-section, however, does not apply to companies because section 5 of the Bankruptcy Act excludes companies from the operation of the Bankruptcy Act.''

19. In 1944 the ITAA was amended by the addition of s 80(5), which is the forerunner to s 80A. Section 80(5) provided that in the case of a private company, losses of prior years were not an allowable deduction unless, on the last day of the year of income, shares in the company carrying not less than 25 per cent of the voting power were ``beneficially held'' by persons who ``beneficially held'' not less than 25 per cent of the voting power on the last day of the year in which the loss was incurred.
Dalgety Downs Pastoral Co Pty Ltd v FC of T (1952) 10 ATD 55; (1952) 86 CLR 335 decided that shares are not ``beneficially held'' by a person within the meaning of s 80(5) unless the name of that person is entered in the register of members in respect of those shares, and that person holds the shares for his own exclusive benefit. At ATD 57; CLR 342 Webb, Fullagar and Kitto JJ stated that the expression ``beneficially held'' in relation to shares is not interchangeable with the expression ``the beneficial ownership of the shares''.

20. Section 80(6) was also inserted into the ITAA in 1944. Section 80(6) provided that for the purposes of s 80A(5) shares beneficially held by a person on the last day of the year of loss shall be deemed to have been beneficially held by the same person on the last day of the

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year of income if the person has died and the shares were, on the last day of the year of income ``beneficially held by the trustee of his estate'', or by a shareholder who received the shares as beneficiary of his estate. That expression was described by Dixon J in
Avon Downs Pty Ltd v FC of T (1949) 9 ATD 5 at 13; (1949) 78 CLR 353 at 364 as a ``remarkable expression'', conveying that the trustee holds the shares as part of the estate and not for some other person claiming adversely to the beneficiaries.

21. The Report of the Commonwealth Committee on Taxation of June 1961 (the Ligertwood Report) noted that s 80(5) and s 80(6) were introduced into the ITAA in 1944 as a war-time measure. The Treasurer of the day had explained that the measures were intended to deal with problems experienced with alien refugees who had been refused permission to form companies for purposes not likely to aid the war effort, and who evaded this prohibition by buying up shares in companies which were practically defunct, then changing the nature of the companys' business.

22. The Ligertwood Report stated (at par 249) that ss 80(5) and (6) appear to have continued in the ITAA merely as a means of limiting, for the benefit of the Revenue, the allowance of losses of previous years incurred by certain private companies. The Ligertwood Report continued:

``We are aware that there has been a `hawking' of losses by companies which have found that the most valuable asset they possessed was the debit balance in the Profit and Loss Account.''

23. The Ligertwood Report recommended the repeal of subsections (5) and (6) of s 80, as a company is a legal entity separate from its shareholders, hence a company's losses should be treated for fiscal purposes without regard to the identity of its shareholders. The Ligertwood Report noted that in his speech against the 1944 Bill, the then Leader of the Opposition said:

``... It is extraordinary to notice how taxation laws flit about, sometimes treating a company as a legal entity quite distinct from its shareholders and then again, as in the present instance, suddenly saying `We shall cease to look at the company, but shall look at the shareholding'.''

24. Section 80A was inserted into the ITAA by Act No 110 of 1964. The former s 80(5) and (6) were repealed. Instead, s 80A(1) required that in order for a loss to be carried forward, shares carrying the right to exercise not less than 2/5 of the voting power in the company, and carrying the right to receive not less than 2/5 of any dividends that might be paid on capital that might be returned, should be beneficially owned during the year of income by persons who beneficially owned shares carrying rights of that kind in the year of loss.

25. The Explanatory Memorandum for the 1964 Bill noted that ss 80(5) and (6) were enacted in 1944 to inhibit a practice under which shareholders in a private company with accumulated losses sold their shares in the ``loss'' company to a successful company which then rearranged its affairs so that its business was channelled through the ``loss'' company. One consequence of such arrangements was that losses incurred by a private company at a time when it was owned by various individual shareholders became deductible from income derived by that company after the shares in the ``loss'' company had been transferred to the purchasing company. A second result was that the Commonwealth lost tax on an amount of income equal to the losses accumulated at the time the shares were sold. The price at which the shares were sold was arranged so that the tax saving was, in effect, shared between the original shareholders of the ``loss'' company and the purchasing company.

26. The Explanatory Memorandum also noted that since ss 80(5) and (6) were introduced into the ITAA, private companies had devised transactions which were outside the scope of those provisions such that the provisions were largely ineffective, and in any event, they had no application to public companies.

27. The Explanatory Memorandum does not give any indication as to why ``beneficial ownership'' of shares was adopted as the benchmark for determining substantial continuity of shareholding in substitution for that of shares which were ``beneficially held''. The change apparently favours the taxpayer.

28. Section 80E was inserted into the ITAA by Act No 103 of 1965. In very general terms the effect of s 80E is that notwithstanding a change in beneficial ownership of shares in a

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company prior year losses may be deducted if certain continuity of business tests are satisfied. One requirement in s 80E(1)(c) is that the loss company carry on during the year of income the same business as it carried on immediately before the change in beneficial ownership took place. The Explanatory Memorandum for the 1965 Bill stated that a company will be entitled to deductions for losses of previous years notwithstanding a ``substantial or total change in the identity of the owners of shares in the company'' provided the conditions specified in s 80E are otherwise satisfied.

29. Act No 103 of 1965 also amended s 80A so as to make it subject to ss 80B to 80E. It also introduced s 80B(5) in the form considered by the High Court in
FC of T v Students World (Australia) Pty Ltd 78 ATC 4040; (1977-1978) 138 CLR 251. The amendments enlarged the events in which the Commissioner could exercise his discretion to treat shares beneficially owned by a person under the general law as not being beneficially owned by that person. At ATC 4047; CLR 263-264 Mason J reviewed the legislative history of the provisions, and concluded that the purpose of s 80B(5) was to enable the Commissioner to deny to a company the deduction of its past losses if arrangements were made in consequence of which the continuing shareholders are or might be deprived of some of the rights, privileges, benefits or advantages generally associated with the ownership of shares, although the arrangement might not in itself destroy the beneficial ownership as such.

30. In 1973 the ``continuing ownership test'' was strengthened so as to require a continuing ownership of shares carrying more than one- half (in lieu of 2/5) of the voting, dividend and capital rights. Section 80DA was inserted into the ITAA by Act No 51 of 1973. The effect of s 80DA was summarised in the Explanatory Memorandum for the 1973 Bill as an additional safeguard that the loss deduction will not be allowable where the benefit of the deduction will flow, to a disproportionate extent, to persons who were not beneficial owners, directly or indirectly, of an interest in the company in the year in which the loss was incurred.

31. As far as the research of counsel has revealed, the expression ``beneficial ownership'' in relation to shares first appeared in s 31A of the Income Tax Act 1922-1934 (Cth). Under that section, the status of one company as a subsidiary of another was determined by reference to the beneficial ownership of shares. Section 103(2)(b) of the ITAA was in similar terms when it was inserted in 1936. Section 103A(4) of the ITAA also requires the status of one company as a subsidiary of another to be determined by reference to the beneficial ownership of shares, and beneficial entitlement to receive dividends and distributions of capital. In
FC of T v Casuarina Pty Ltd 71 ATC 4068 at 4074; (1970-1971) 127 CLR 62 at 91 Walsh J said, in the context of s 103A(4), that as there was no evidence of any agreement in that case that the shares or any rights attached to them were to be held on behalf of some other person, the shares were beneficially owned by the holder.

The authorities

32. The English Court of Appeal decided in
In re Oriental Inland Steam Co; ex parte Scinde Railway Co [1873-1874] LR 9 Ch App 557 that on the making of a winding up order, the property of the company became trust property, as it is property affected by an Act of Parliament with an obligation to be dealt with by the proper officer in a particular way. In the view of Sir W M James LJ the assets of the company are fixed by the Act of Parliament with a trust for equal distribution amongst the creditors. The property had ceased to be beneficially the property of the company. Sir G Mellish LJ recognised that winding up differed from bankruptcy in as much as on a winding up the legal estate in the property of the company remains in the company. Nonetheless, ``the beneficial interest is clearly taken out of the company'' (at 560) and the effect of the statutory regime is to constitute a trust for the benefit of all of the creditors.

33. That decision was followed by Buckley J in
Inland Revenue Commissioners v Olive Mill Ltd [1963] 1 WLR 712. The issue there was whether a company ceased to be a subsidiary of its former parent on the winding up of the holding company. The test for determining whether there was a parent/subsidiary relationship was whether the parent company is the beneficial owner of not less than 75 per cent of the capital of the subsidiary. Buckley J held that it was established by the authority of In re Oriental Steam Co (supra) that, on the winding up resolution being passed in relation to the parent, the beneficial interest in the shares in

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the former subsidiary ceased to reside in the holding company.

34. These decisions were considered by Menzies J in
Franklin's Selfserve Pty Ltd v FC of T 70 ATC 4079; (1970) 125 CLR 52, in the exercise of the original jurisdiction of the High Court. There, a company called Major 8 was the registered holder of voting shares in the taxpayer in the years in which losses were incurred (1962, 1963 and 1964) and in the year of income (1965). Major 8 was wound up as insolvent in 1963. It was conceded by the Commissioner that apart from the provisions of the then s 80(5) of the ITAA (see [19] above), the taxpayer would have been entitled to a deduction for these past losses in respect of the 1965 tax year. However, the Commissioner contended that the taxpayer did not, and could not, establish to his satisfaction that the voting shares held by Major 8 in the 1965 tax year were held beneficially, as Major 8 had been wound up as insolvent in 1963, with the consequence that the shares in the taxpayer registered in its name were no longer held by Major 8 beneficially. Menzies J rejected the Commissioner's contention.

35. His Honour found, having regard to the statutory context, and in particular, to s 80(6), that:

  • - s 80(5) is concerned with a continuing identity of interest such as there is, for instance, between a shareholder and the person who, on his death, becomes his trustee, notwithstanding that he holds for beneficiaries;
  • - this identity of interest does not cease when a shareholder, which is a company, goes into liquidation;
  • - a company which goes into liquidation is not itself a trustee of its assets for anybody;
  • - the liquidation of a company does not of itself deprive the company in liquidation of the beneficial holding of its shares. ``They are available for the purposes of its winding up'' (at ATC 4089; CLR 70); and
  • - the position would be otherwise if an order vesting the shares in the liquidator were made.

36. His Honour concluded as follows (at ATC 4090; CLR 71):

``Having examined the authorities cited, not to control the language of sec 80(5) but to inform myself of the principles to be applied, I have come to the conclusion that I would be going further than the statute warrants were I to hold that, for the purposes of sec 80(5), a company which owns shares beneficially in another company ceases, upon its liquidation, to own those shares beneficially. These shares remain the property of the company and the beneficial interest is not, by virtue of the liquidation, vested in any other person or persons.''

(emphasis added)

It is apparent from the words which I have emphasised that the decision was not influenced by the fact that the former s 80(5) referred to shares being beneficially held, rather than to the beneficial ownership of shares.

37. In
Wood Preservation Ltd v Prior [1969] 1 WLR 1077 a conditional contract for the sale of shares in a company was entered into. The issue was whether the vendor remained the beneficial owner of the shares agreed to be sold until satisfaction of the condition. The English Court of Appeal held that ``beneficial ownership'' in the context of the Finance Act 1954 (UK) there under consideration meant the right to deal with property as one's own, a right which the vendor lost by the entry into the contract in question. At WLR 1095-1096 Lord Donovan described the arrangement in this way:

``The shares (in a word) were like a tree which the owner could not sell and could not cut down and of which he could enjoy none of the fruit.''

His Lordship accepted that the purchaser did not become the beneficial owner of the shares while the condition remained operative, but said ``(i)t is possible for property to lack any beneficial owner for a time''. Widgery LJ (at WLR 1097) said that whilst there are many circumstances in which there may be no identifiable beneficial owner of property, he found it difficult to accept, in the context of a contract of sale of the kind there under consideration, that beneficial ownership could leave the vendor without simultaneously arriving in the purchaser. But his Lordship was persuaded that Lord Donovan was correct in approaching the matter on the basis that one must examine the situation of the vendor, and enquire whether his legal ownership retained the attributes of beneficial ownership for the purposes of the legislation.

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38. In
FC of T v Brian Hatch Timber Co (Sales) Pty Ltd 71 ATC 4093 at 4100; (1971-1972) 128 CLR 28 at 40, Walsh J, referring to Lord Donovan's statement in Wood Preservation (supra), said that although there may be special circumstances in which property may lack a beneficial owner for a time, he had the same difficulty in thinking that it could be so in a case where the issue was whether beneficial ownership of shares had changed from one person to another as Widgery LJ had in Wood Preservation.

39. The question of whether the making of a winding up order has the effect of divesting the company of ``beneficial ownership'' of its assets within the meaning of that expression in the Finance Act 1954 (UK) was considered by the House of Lords in
Ayerst (Inspector of Taxes) v C & K (Construction) Ltd [1976] AC 167. Lord Diplock (with whose speech the other members of the House agreed) held that:

  • - ``beneficial ownership'' of property subsists in a person if the person can enjoy the fruits of the property himself or dispose of it for his own benefit;
  • - a person who holds property may not be the beneficial owner of the property even if it is not possible to identify some other person in whom the beneficial ownership has become vested;
  • - an executor, for example, is not the beneficial owner of property, even though it may be impossible to identify any person in whom the beneficial ownership of a particular asset in the estate is vested until the estate is fully administered;
  • - In re Oriental Inland Steam Co establishes that upon the winding up of a company the property of the company ceases to belong beneficially to the company and that decision has stood for 100 years;
  • - the statutory scheme for dealing with the assets of a company in winding up gives to the property of a company in liquidation the essential characteristic which distinguished trust property from other property, viz, that it could not be used or disposed of by the legal owner for his own benefit, but must be used or disposed of for the benefit of other persons;
  • - liquidation deprives the company ``of all possibility of enjoying the fruits of [the property] or of disposing of it for its own benefit''; and
  • - there has been a consistent use in UK taxing statutes of the expressions ``beneficial owner'' and ``beneficial ownership'' for many years where the context makes it clear that a company, upon going into liquidation, ceases to be the ``beneficial owner'' of its assets as that expression is used in a taxing statute.

40. The issue in
J Sainsbury PLC v O'Connor (Inspector of Taxes) [1991] 1 WLR 963 was whether a taxpayer was the beneficial owner of the whole of its 75 per cent shareholding in a company in circumstances where it had granted a put and call option over 5 per cent of the capital, to another shareholder, exercisable in 5 years. Lloyd LJ described the term ``beneficial ownership'' as a term of art, well known and understood among lawyers (at 970). His Lordship stated that there is good authority for the view that when the term is used in a statute in contrast to the registered holder, it means the equitable owner; neither more nor less (at 972). Further, his Lordship said that there are special circumstances in which a person or company may be deprived of the beneficial ownership of his assets, even though it is not yet possible to identify his successors in title. Examples are property held by a trustee in bankruptcy, the property of a company in liquidation, property held by the executor of an unadministered estate, and assets vested in a custodian of enemy property. In all such cases the equitable or beneficial ownership of the property is in suspense, but the legal owner is deprived of beneficial ownership by operation of law as a consequence of supervening events (at 972). However, the decision in Wood Preservation prevented the case being decided on the straightforward ground that Lloyd LJ would otherwise favour, namely that beneficial ownership and equitable ownership are one and the same thing. However, Lloyd LJ held that the nature and extent of the rights retained by the taxpayer in relation to the 5 per cent were such that its holding was more than ``a mere legal shell'', hence the decision in the Wood Preservation case was distinguishable.

41. Nourse LJ said (at 978) that ``beneficial ownership'' is a term which, for many centuries, has had a very well recognised meaning amongst property lawyers. It means

ATC 4794

ownership for your own benefit as opposed to ownership as trustee for another. It exists either where there is no division of legal and beneficial ownership, or where the legal ownership of property is vested in one person and beneficial ownership or, which is the same thing, the equitable interest in the property, is in another. In a vendor/purchaser context, his Lordship would have thought, but for authority, that the beneficial interest in the property could not be suspended somewhere between vendor and purchaser; if it has not passed to the purchaser, it must remain in the vendor. But his Lordship said that that is not in any way to cast doubt on ``the well known examples of a suspension of beneficial ownership'' to which Lloyd LJ has referred, but they are far removed from contracts for the sale of land or of shares.

42. Unsurprisingly, in Sainsbury (supra) the Court of Appeal followed the decision of the House of Lords in Ayerst (supra). None of the English cases referred to the decision of Menzies J in Franklin's Selfserve (supra).

43. In
FC of T v St Hubert's Island Pty Ltd 78 ATC 4104 at 4116; (1977-1978) 138 CLR 210 at 233 (Mason J) and at ATC 4125; CLR 250 (Aickin J), reference was made to an ``apparent conflict of opinion'' between Lord Diplock in Ayerst and Menzies J in Franklin's Selfserve, which their Honours found it unnecessary to resolve in order to decide the case before them. It may be (although his Honour does not say so) that the expression ``apparent conflict'' was used by Mason J in recognition of the fact that the two cases were concerned with the meaning of the term ``beneficial ownership'' or ``beneficially held'' in different statutes, and at least to some extent, the particular statutory context impacted upon the construction given to the term.

44. In
DFC of T v AGC (Advances) Ltd & Ors 84 ATC 4177 at 4183; (1984) 1 NSWLR 29 at 37 Mahoney JA did not find it necessary to decide, in a revenue context, whether it is proper to describe the relationship of a company in liquidation to its property as that of a trustee, or whether it is properly to be described as that of owner or beneficial owner, whose interest is subject to the statutory powers and obligations involved in the liquidation. Ryan J, in
Re Allan Fitzgerald Pty Ltd (in liq) 93 ATC 4018 at 4022; (1992-1993) 9 ACSR 627 at 632 referred to the apparent conflict between the decisions in Ayerst and Franklin's Selfserve, but did not find it necessary to attempt to resolve it.

45. The issue arose again in
Mineral & Chemical Traders Pty Ltd v T Tymczyszyn Pty Ltd (1994) 13 ACLC 40; (1994) 15 ACSR 398. At ACLC 54; ACSR 416 Santow J said that the earlier English decisions discussed in Ayerst, do not go so far as to hold that the assets of a company in a winding up are subject to a trust in the strict sense, rather they speak in terms of analogy to a trust. His Honour said that the decision in Ayerst, insofar as it holds that on winding up the company ceases to be the beneficial owner of its property, is in conflict with the decision of Menzies J in Franklin's Selfserve, but his Honour did not find it necessary to proceed beyond noting the conflict.

46. In
FC of T v Macquarie Health Corporation Ltd 98 ATC 5214 it was contended that debts owing to a corporate taxpayer ceased upon the making of winding up order to be payable to the taxpayer, but were ``in substance'' payable to the liquidator. Emmett J rejected that contention. At 5227 his Honour said:

``I do not consider that the Liquidator's analysis is correct. It is certainly true to say that, by the operation of sections 471(A) and 474 of the [Corporations] Law, the directors of a company may no longer perform or exercise any function or power as an officer of the company without the consent of the liquidator or the Court. Further, control of all of the property of the company is taken from the directors and vested in the liquidator. However, there is no change in the beneficial ownership of the property of the company. The company continues as a legal entity capable of owning property. The property of the company remains beneficially owned by the company.''

47. His Honour made these observations after referring to Ayerst. The provisions of the Corporations Law providing for the stay or termination of the winding up indicated, in his Honour's view, that CL s 471(A) and s 474 are concerned only with the control of the property of the company and not in any way with ownership of it. This decision is said by the author of McPherson (supra) to be ``against the authorities on the subject and appears to be wrong'' (at 219). The authorities relied upon for that statement by the author are In re Oriental

ATC 4795

Inland Steam Co and Ayerst, but no reference is made to the decision of Menzies J in Franklin's Selfserve, which supports the conclusion reached by Emmett J as well as the process of reasoning by which the conclusion was reached.

48. Finally, in
CPH Property Pty Ltd & Ors v FC of T 98 ATC 4983; (1998) 88 FCR 21 Hill J said at ATC 5006; FCR 50 that ``there is perhaps a conflict'' between the House of Lords decision in Ayerst and the decision of Menzies J in Franklin's Selfserve, and ``as presently advised I would prefer the view of Menzies J in the present context'' (ie, dividend stripping).

The views of some commentators

49. In Principles of Corporate Insolvency Law 1990, Professor Goode states as his sixth principle: ``on liquidation the company ceases to be the beneficial owner of its assets''. Under that heading the following appears (at pp 20-21):

``Though winding up does not of itself divest the company of legal title to its assets, it ceases to be the beneficial owner and holds the assets on trust to apply them in discharge of the company's liabilities in accordance with the statutory scheme of distribution. Accordingly the assets can no longer be used or realised by the company for its own benefit. Moreover, the fact that the company loses beneficial ownership on winding up may have important tax consequences.''

This passage is largely based upon Re Oriental Inland Steam Co, and upon Ayerst.

50. In Meagher, Gummow and Lehane Equity Doctrines and Remedies 3rd Ed 1992 at [410], the authors refer to authorities which establish that the statutory scheme for liquidation of companies does not create any trust under which creditors or members have any equitable interest in the assets of the company. The legal title to the assets of the company is not vested in the liquidator. These propositions are uncontroversial. The controversy is whether, on winding up, the company still retains the beneficial ownership of its assets.

51. At [411] the authors say:

``Lord Diplock treated the issue as one of whether the companies legislation deprived the company `of all possibility of enjoying the fruits of [the property] or of disposing of it for its own benefit'. Menzies J had (to our minds, correctly) held that there was no automatic loss of such possibilities. Lord Diplock held to the contrary. Previous decisions which spoke of the company's assets as `trust property' did no more than to direct attention to the truism that they could not be used or disposed of by the legal owner for his own benefit. The position thus is reached that both Lord Diplock and Menzies J agree that the company in liquidation is not a trustee of its assets, in the ordinary sense, but they differ as to the next step. To Menzies J, this is that the company has not been deprived of its beneficial interest; to Lord Diplock, the company has by force of the legislation been so deprived but not so as to vest beneficial interests in any other group or individual, and Livingston's case indicates that the result is not an anomalous `gap' or lacuna in the title to the assets in question.

Of Lord Diplock's judgment, Megarry V-C has observed (in
Tito v Waddell (No 2) [1977] Ch 106 at 227) that it shows the use of `trust' to describe a relationship which is not a trust `in the full sense of the word'; the first question on seeing that protean term used is to ask the sense in which it is employed. Mr Callaway has urged the view that an Australian court should prefer the views of Menzies J to those of Lord Diplock: `The Ownership of the Assets of Companies in Liquidation' (1976) 5 ATR 61.''

52. The basis on which Mr Callaway (as he then was) expressed a preference for the views of Menzies J, is that a company is no more than the members considered as an aggregation of persons rather than as individuals. Legal personality is a device by which the law separates the members considered as an aggregation of persons from the members in their individual capacities. The latter have no legal or equitable interest in the company's property but, considered as the company, they are the persons who may sue or be sued in its corporate name and who own its property. At 5 ATR 61 at 63, Mr Callaway said:

``Considered from this point of view it is not unrealistic to say that a company benefits from its assets being applied to its own liquidation. What is really being said is that the members, not as individuals but in their capacity as persons associated with separate

ATC 4796

legal personality for purposes such as suing and being sued and owning property, benefit from the payment of the corporation aggregate's liabilities and the distribution of any surplus to its members.''

Consideration

53. It is not the Commissioner's case that there has been a change in the beneficial ownership of LGL's shares in LTAL in the sense that some person other than LGL has become the beneficial owner of those shares in consequence of the liquidation of LGL. Rather, the case is that the beneficial ownership of those shares has changed as beneficial ownership is ``suspended'' whilst LGL is in liquidation, as the shares in LTAL are held for the benefit of creditors of LGL whilst the winding up subsists, to be disposed of in accordance with the applicable statutory scheme. For convenience, I have only referred to provisions of the Corporations Law in describing the statutory scheme, as there are no material differences between the provisions of the Companies Code and the Corporations Law in this respect.

54. On the other hand, the taxpayer submits that s 80A(1) is only enlivened if there is a change in the beneficial ownership of shares in the loss company from one person to another, and, in any event, the liquidation of LGL did not impact upon the beneficial ownership of its assets.

55. The expression ``beneficially owned'' (and variants upon that expression) are not defined in the ITAA. The language of legal or equitable estates in property is not used in the relevant sections of the ITAA, although these concepts are well understood, and are truly terms of art. Use of the expression ``beneficially owned'' places emphasis on the concept of benefit, rather than on the jurisdictional division between legal and equitable interests: Stone & Lesnie ``Some Thoughts on Beneficial Interests and Beneficial Ownership in Revenue Law'' (1996) 19 UNSWLJ 181. As the authors there demonstrate, it is an expression frequently encountered in revenue statutes, usually without definition.

56. The person recognised in equity as being the owner of shares, but who does not hold the legal title to those shares because they are registered in the name of another, is the beneficial owner of the shares in question. The shares are held for his or her benefit. The person is also referred to as the equitable owner of the shares. But a registered holder of shares may also be the beneficial owner of those shares, if the holder is entitled to the enjoyment of the shares and they are not held for the benefit of some third party. A beneficial owner who also holds the legal estate does not hold two estates (a legal and an equitable estate), but only the legal estate with all the rights and incidents attached to that estate:
DKLR Holding Co (No 2) Pty Limited v Commr of Stamp Duties (NSW) 80 ATC 4279; [1980] 1 NSWLR 510;
Re Transphere Pty Ltd & Ors (1986) 4 ACLC 426; (1986) 5 NSWLR 309.

57. But if, as here, there are no outstanding equitable interests in the shares, does it follow that the legal owner of the shares is to be regarded as the beneficial owner of them? It all depends upon what is meant by ``beneficial ownership'' in the particular statutory context. At least in some circumstances and for some purposes an owner of property would not be regarded as the beneficial owner of that property even though equitable interests in the property do not subsist in favour of others. Thus, one would not ordinarily regard the executor of an unadministered estate as the beneficial owner of the deceased's property (see
Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694 at 708, 712) even though the beneficiaries do not have a specific equitable interest in the assets of the estate at that point in time.

58. It would be consistent with the decision of the High Court in Dalgety Downs (supra) to treat the word ``beneficially'' in the expression ``beneficially owned'' as excluding the case where shares are owned for the benefit of others. But in what circumstances will shares be owned for the benefit of others?

The Statutory Context

59. The ITAA specifically prevents pre- bankruptcy losses from being carried forward in the case of an individual. Notwithstanding numerous amendments to the relevant provisions made since 1944, mainly with a view to a tightening up of those provisions, the legislature has abstained from enacting a corresponding provision in relation to companies.

60. The mischief to which the relevant provisions of the ITAA is directed is the protection of the revenue against the

ATC 4797

consequences of trafficking in losses. That end is achieved by lifting the corporate veil, and requiring there to be a substantial continuity in the beneficial ownership of the shares in the loss company in both the year of income and the year of loss. As Menzies J held in Franklin's Selfserve, the continuing identity of interest which s 80A(1) requires does not cease when a company goes into liquidation. LGL remains the owners of its shares in LTAL, and no third party acquires any proprietary interest in those shares. The liquidation of LGL does not result in any trafficking in losses and, as s 80E(1) recognises, s 80A(1) is concerned with changes which may have occurred in the beneficial ownership of shares in the company between two points in time. Section 80A(1) implicitly assumes that one or more persons can be identified as the beneficial owner of the shares at each of those points in time. To hold that, in the case of a liquidation, there is a suspension of beneficial ownership is not consistent with that assumption, and does not further the purpose which s 80A(1) was intended to achieve.

61. These factors suggest that ``beneficial ownership'' is used in s 80A(1) in the traditional sense which encompasses both equitable ownership, and legal ownership where nobody else would be regarded by a court of equity as having a proprietary interest in the shares. They also suggest that it is a change in that beneficial ownership by transmission from one person to another which enlivens s 80A(1). On that basis, LGL remained the beneficial owner of its shares in LTAL notwithstanding the liquidation of LGL as no one else acquired a proprietary interest in those shares.

62. Section 80A(3) provides another test involving the tracing of interests in order to determine whether losses may be carried forward. As noted at [6] above, there was a dispute between the parties as to whether s 80A(1) and (3) are alternative, or cumulative requirements, but it is not necessary to resolve that issue in the light of the agreements which have been reached. What may be important for present purposes is that under pars (b) and (c) of s 80A(3) the ultimate human controller(s) of the loss company should be entitled to receive for his or their ``own benefit'' more than one half of dividends distributed or capital returned. In the Commissioner's submission this provision provides some insight into the meaning of ``beneficially owned'' in s 80A(1). In my view it does not assist. The same question is thrown up, namely whether property is held for a person's own benefit unless it is held, by that person, on behalf of some other person.

The alternative approach

63. The alternative approach involves a factual enquiry. If the applicable companies legislation leaves a company in liquidation with the legal ownership of its property, but deprives the company of all possibility of enjoying the fruits of that property or disposing of it for its own benefit (as Lord Diplock held in Ayerst) it may follow as a matter of fact that the company no longer holds its property for its own benefit, even though it does not hold that property on behalf of someone else. Hence the notion that beneficial ownership is ``suspended''. It is beside the point, so the alternative argument goes, that this result has come about by some means other than the creation or imposition of a trust in relation to that property.

64. Winding up does not necessarily deprive the company of ``all possibility of enjoying the fruits of its property'', if only because the winding up may be stayed or terminated at some later stage. It is also possible that particular assets of the company may be consumed in the conduct of the company's business during the period in which the liquidator is authorised to carry on that business. The winding up of LGL does not strip LGL of the risks and benefits of ownership of the shares which it holds in LTAL. If LTAL was not in liquidation and a general meeting of LTAL were called whilst LGL was in liquidation, LGL could vote; if dividends were declared or capital returned by LTAL, then LGL would be the recipient of the payment. LGL can sell the shares, and if LGL is insolvent, the liquidator may be under a duty to bring about a sale. LGL (by its liquidator) is not subject to any direction by any third party in relation to these matters.

65. It is true that the realisation of the company's assets is under the control of its liquidator, and that the proceeds of realisation must be applied in accordance with the statutory scheme. But the fact that there is a change in control of a company has no impact on the beneficial ownership of its assets, and the fact that the assets of a company are available to be realised for the purposes of its

ATC 4798

winding up is more a recognition that the company is the beneficial owner of those assets, rather than a denial of that proposition. One of the ways in which a company may benefit from its ownership of property is by its sale and the application of the proceeds of sale in payment of the company's liabilities, even if that result is achieved by the mechanism of payment of dividends pari passu on proven debts. I conclude that even on the alternative approach, LGL remains the beneficial owner of its shares in LTAL notwithstanding the liquidation of LGL.

The liquidation of LTAL

66. The Commissioner's alternative argument is that from the time of commencement of their respective windings up, the shareholders of LTAL and LGL ceased to own beneficially shares carrying rights of a kind specified in subsections 80A(1) and 80A(3). That is because from the commencement of the winding up, the shareholders ceased to have the right to exercise any voting power in the company, and ceased to have any right to control the company through the exercise of voting power. On the winding up of the companies, the shareholders' rights became those of a contributory in substitution for the right to dividends and return of capital formerly enjoyed by a member.

67. LGL did not cease to be the beneficial owner of shares in LTAL by virtue of the liquidation of LTAL. As the definition of ``contributory'' in CL s 9 makes plain, it is because LGL is the holder of fully paid shares in LTAL that, for the purposes of the Corporations Law, it also falls within the description of a contributory.

68. However, the shares which LGL held in LTAL continued to carry the rights referred to in s 80A(1)(c), (d) and (e) notwithstanding the winding up of LTAL. The issue is not whether those rights were likely to be exercised during the subsistence of the winding up. Rather, the question is whether if a meeting were held, a dividend declared or a distribution of capital were made, the rights attaching to the shares would give rise to the entitlements referred to in s 80A(1)(c), (d) and (e): FC of T v Casuarina Pty Ltd (supra), FC of T v Brian Hatch Timber Co (Sales) Pty Ltd (supra). Whilst the opportunity for enjoyment of the rights may not arise whilst LTAL is in liquidation, the rights attaching to the shares in LTAL remain the same: cf (albeit in a different context)
White v Bristol Aeroplane Co Ltd [1953] 1 Ch 65 at 74.

69. For this reason, the alternative argument fails.

70. The objection decision should be set aside, and the objection upheld. The Commissioner should pay LTAL's costs of these proceedings.

THE COURT ORDERS THAT:

1. The objection decision should be set aside and the applicant's objection upheld.

2. The respondent pay the applicant's costs of the proceedings.


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