Case A39

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 18 July 1969.

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J L. Burke (Chairman) and RC. Smith QC. and RE. O'Neill (Members): The question in this reference is whether, in terms of sec. 23F(16), it would be reasonable to exempt a dividend of $600 paid in the year ended 30 June 1966 to the H Staff Provident Fund by private company H.

2. H Pty. Ltd. was incorporated in May 1955 to take over as a going concern for cash the business of motor body repairs which two individuals, H and W, had carried on as equal partners since 1952. H and W each subscribed for 500 shares at par of $2 each in the newly formed company. Under the Articles both H and W became directors for life.

3. The shares were under the control of the directors with authority to allot shares to such persons and on such terms as they might think fit. In January 1956 Mrs. H

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and Mrs W each applied for and was allotted 250 shares at par of $2 each.

4. In October 1959 a deed for the establishment of a Staff Provident Fund was executed. The rules provided that ``every employee of the company may with the consent of his employer'' become a contributor to the Fund. Upon admission each member (contributor) became obliged to contribute at a rate nominated in his application being not more than 25 cents in the dollar of his wages. The company was to contribute the equivalent of the member's contribution. In addition the company might in its discretion make special payments to the Fund for the benefit of members specified by it.

5. H and W each became members of the Fund and on 24 June 1960 the company made a special contribution to the Fund of $800 to be applied $400 for the benefit of H and $400 for the benefit of W. No other special payment has been made to the Fund by the company. During the year ended 30 June 1961 H and W each contributed $416 (a weekly rate of $8) and the company contributed the like amount in respect of each of them. In each succeeding year up to and including the year ended 30 June 1966 the two members and the company contributed the same amounts as they had contributed during the year ended 30 June 1961.

6. On 17 April 1961 the trustees of the Fund applied for and were allotted 500 shares in H Pty. Ltd. at par of $2 each. The net assets backing for the shares was then $7 per share without taking into account trading results for the then current year. The issued capital was now 2,000 shares of $2 each fully paid up and at 30 June 1966 the position was the same. All shares were of the same class and had the same rights.

7. At 30 June 1966 the assets of the Fund were at cost-

   500 shares of $2 each in H Pty. Ltd.       $1,000
   Commonwealth Bonds                         12,000
   Loan to H Pty. Ltd.                           600
   Savings Bank                                2,047
                                           ---------
                                             $15,647
                                           ---------
          

8. The source of the funds represented by the assets as above was-

   Contributions by H and W.                   $4,992
   Contributions by company -
   Special initial contribu-
   tion                       $800
   Ordinary contributions    4,992              5,792
                            -------
   Dividends from H Pty. Ltd.                   3,492
   Interest on Savings Bank and
   Bonds                                        1,371
                                            ---------
                                              $15,647
                                            ---------
          

9. As well as the two full time working directors, H and W, it seems that the company ordinarily employed four or five other persons of whom at least one was employed for more than five years. However, no person other than H and W has at any time been a member of the Fund.

10. By virtue of the trustees' shareholding, the Fund has a one-quarter interest in the company. That interest was acquired in April 1961 for an outlay of $1,000, although the real worth of such interest was then in the vicinity of at least $7,000. The allotment to the Fund of shares at par is readily understandable in light of the fact that the only two beneficiaries of the Fund were also the only directors of the company and, with their wives, were the only other shareholders. Ultimately, therefore, the benefit of the Fund's one-quarter share in profits distributed by the company would enure entirely to those other shareholders. What was done is what one might expect to be done by parties who in substance are dealing with themselves for their own benefit. The situation only superficially resembles that of a public company which issues shares on very favourable terms to the trustees of a superannuation fund for its own employees, because in such a case the resulting benefits to the fund enure to member-employees, few of whom are likely to be also shareholders of any significance in such a public company.

11. In forming our opinion, the way in which we are influenced having regard to the matters specified in sub-sec. (16) is as follows: under paras. (a) and (b) we are influenced against an opinion favourable to the Fund because it got too great an interest in the company for too little an outlay; under paras. (c) and (d) we are influenced neither one way nor the other because the company declared a dividend designed to meet the ``sufficient distribution'' requirements of Div.

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7, Part III, of the Act and paid the same ``rate of dividend'' (which we think has its normal company law meaning) on all the issued shares which were all fully paid up to $2 each; under para. (e) there is upon the facts of the case nothing to consider; under para. (f) one matter favourable to the claim is that H and W as members of the Fund contributed thereto equally with the company (apart from the modest initial special contribution made by the company), but that fact is overwhelmed by the facts that the $600 dividend received by the Fund is one-quarter of the $2,400 paid as dividend by the company and that the whole of such $600 enures only to the benefit of the two director-shareholders. The cumulative effect of the foregoing matters is that we are not of the opinion that it would be reasonable to exempt the dividend from tax.

Claim disallowed