Case A57

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

Court:
No. 1 Board of Review

Judgment date: 11 December 1969.

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J. L. Burke (Chairman), R. C. Smith and R. E. O'Neill (Members): During the year 1948 C Pty. Ltd. was formed to take over a manufacturing business previously carried on by a partnership and a few days later E Pty. Ltd. was formed to act as the wholesaler and distributor of the goods manufactured by C Pty. Ltd. In 1954 a further manufacturing company, C2 Pty. Ltd., was formed by the subscribing shareholders in the other two companies.

2. In 1957 the C Pty. Ltd. Employees Superannuation Fund (hereinafter called ``the Fund'') was established by Deed (subsequently amended in 1961) and the two subscribing shareholders in the three operating companies and their wives became members and remained as such up to and including the year ended 30 June 1965. There were no other members of the Fund to this date although offers were made from time to time to two senior employees to join the Fund but they refused, preferring to take an increase in salary.

3. In January 1961, Holdings Pty. Ltd. was incorporated with a view to becoming the holding company of C Pty. Ltd., E Pty. Ltd. and C2 Pty. Ltd., and it duly purchased the issued shares in these companies for a total consideration of $119,218 which the Commissioner accepts as being their then correct value.

4. A further company in the group, Nominees Pty. Ltd., was incorporated in April 1961 as a trustee company to act as trustee for certain accumulation trusts established for the previous shareholders of the operating companies and some of their relatives, and by resolutions of the directors of Holdings Pty. Ltd. in March and April 1961 shares to the face value of $8,484 were issued by that company to those shareholders, to Nominees Pty. Ltd. and to the Fund. Of the 4,242 shares so issued the Fund received 500 B class shares and 500 C class shares, thus giving it a 23.5% (approximately) interest in Holdings Pty. Ltd.

5. The purchase of the shares in the three operating companies was financed partly out of the share subscriptions of $8,484 but in the main was financed out of interest free advances made by the various shareholders excluding Nominees Pty. Ltd. and the Fund.

6. During the year of income ended 30 June 1965 Holdings Pty. Ltd. declared dividends on its B and C class shares (no dividend was declared in respect of the A class shares of which only two were issued) and the Fund received, as its share of such dividends, the sum of $750 (giving a rate of 75%) in respect of its 500 B class shares and the sum of $1,950 (giving a rate of 195%) in respect of its 500 C class shares. The total amount of dividends received was $2,700 giving an average rate of 135% on the Fund's total shareholding.

7. In assessing the Fund's return of income for the year ended 30 June 1965, the Commissioner, after considering the provisions of sec. 46 of the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 did not form an opinion under sub-sec, (3) of that section that it would be reasonable to exempt the above mentioned dividends amounting to $2,700 from tax and consequently they were brought to tax at the prescribed rate of 50%.

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ATC 422

8. The Board is now asked to review the opinion of the Commissioner and to substitute therefor an opinion that it would be reasonable to exempt such dividends from tax.

9. During the course of the hearing we were referred to our four recent decisions on sec. 23F of the Income Tax Assessment Act 1936-1965, which section replaces the transitional provisions contained in sec. 46 of the abovementioned Act of 1964, and an attempt was made to distinguish them on the facts of the present reference. These were Cases A38, A39, A40 and A41 reported respectively at pp. 225, 227, 229 and 233 of 69 ATC and we are of opinion that the approach adopted therein in respect of the proper application of sec. 23F applies likewise in the application of the transitional provisions of sec. 46 of the 1964 Act.

10. Applying the said approach it is clear that the syphoning off of some 23.5% of the profits of Holdings Pty. Ltd. to augment the resources of the Fund is an excessive provision for superannuation benefits and is a consideration to be taken into account under para. (f) of sub-sec. (3) of sec. 46. Another consideration which weighs against forming an opinion that the dividends in question should be exempt from tax is that the amount remaining available in the hands of Holdings Pty. Ltd. for dividends was increased to an extent largely above what one would normally expect insofar as that company acquired its income-producing assets-namely the shares in the three working companies-for a comparatively small commitment on revenue account. Out of the $119,218 paid for those assets not more than $8,484 was provided from funds having a claim on the profits of the company; $110,000 odd was provided by way of interest free loans, thereby leaving an abnormally large part of the gross profits available for dividend. In this respect the facts of this reference bear a marked similarity to those in Case A41,
69 ATC 233, although the manner in which the respective transactions were effected varied.

11. In all the circumstances we are not able to form the opinion, as required by sec. 46(3), that the dividends here in question should be exempt from tax.

Assessment confirmed