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Finance Facilities Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Gibbs J

Court:
High Court

Judgment date: Judgment handed down 27 April 1971.

Gibbs J.: These appeals under sec. 187 of the Income Tax Assessment Act 1936-1968 (Cth) (``the Act'') are heard together by consent. In three of the appeals, Nos. 36 of 1969, 37 of 1969 and 33 of 1969, brought respectively by Talford Investments Pty. Limited (``Talford''), Steed Investments Pty. Limited (``Steed'') and Cargill Investments Pty. Limited (``Cargill''), from assessments based on income derived by each taxpayer during the year ended 30 June 1968, each taxpayer claims to be entitled to a rebate under sec. 46(2)(b) of the Act obtained by applying the average rate of tax payable by the taxpayer to the full amount of the dividends included in its assessable income, whereas the Commissioner, acting under sec. 46(2)(a), has allowed a rebate based on only half of such dividends. Three further appeals by the same taxpayers, Nos. 24 of 1970, 25 of 1970 and 23 of 1970, are from assessments to additional tax under Div. 7 of Part III of the Act in respect of the same income year. In all those six appeals each assessment was made on the basis that the taxpayer was a private company within the meaning of the Act in relation to the year of income that ended on 30 June 1968 and the case for each taxpayer is that it was a public company in relation to that year of income. The remaining appeal, No. 11 of 1969, is brought by Finance Facilities Pty. Limited (``Finance Facilities'') against an assessment based on income derived during the year ended 30 June 1967 by which the Commissioner allowed a rebate under sec. 46(2)(a) based on one-half of the private company dividends included in the taxpayer's assessable income. In that appeal the taxpayer concedes that it was rightly regarded as a private company but claims that it should have been allowed a further rebate under sec. 46(3) of the Act.

Talford, Steed and Finance Facilities are associated, in the manner which I shall describe, to serve the interests of Jorge Yacobi and his family. Cargill is conducted for the purposes of John Hitter and his family. The only connection between Talford, Steed and Finance Facilities on the one hand and Cargill on the other is that Talford, Steed and Cargill were all brought into existence by another company, Securities & Management Limited (``Securities & Management''), with the design that they should be public companies for taxation purposes, with the taxation advantages that that status may entail. That they may have that status, it is necessary that Securities & Management should be a public company and it is convenient, first, to consider the evidence as to its position.

Securities & Management was incorporated on 2 January 1959 at the instance of a firm of accountants, Charles J. Berg & Associates. From its formation it was intended that it should be a public company and that it should provide taxation advantages for the clients of Charles J. Berg & Associates. By February 1961, 12,900 shares of 50¢ each fully paid had been issued in Securities & Management and were held by 79 shareholders each of whom held 100 or 200 (or in one case 300) shares. Clearly, Securities & Management was at this time a public company. However, after the publication in June 1961 of the report of a committee under the chairmanship of Sir George Ligertwood which recommended certain changes in the income tax laws, it was thought desirable to alter the shareholding of the company to ensure that if the changes were made the company would continue to be a public company. Accordingly on 26 June 1962, 7000 shares of 50¢ each were allotted to each of Development Underwriting Limited (``D.U.L.'') and Stocks & Realty Corporation Limited (``Stocks & Realty''). Both D.U.L. and Stocks & Realty were public companies and as a result of these allotments they held between them more than half the issued shares of Securities & Management. Applications for these shares were made by D.U.L. and Stocks & Realty at the suggestion of Securities & Management and on the understanding that Securities & Management would pay dividends of 20% per annum. At about the same time loans of $3,600 ($100 more than the amount payable for each parcel of shares) were made by Securities & Management (Nominees) Pty. Limited (a subsidiary of Securities & Management) to Mercantile Estates Pty. Limited (a subsidiary of Stocks & Realty) and to D.U.L. respectively. These loans carried interest at 5%. The minutes of D.U.L. show that the loan to that company was repayable only in the event of a winding-up of Securities & Management; the relevant minutes of Mercantile Estates Pty. Limited were not produced but Mr. Graf, a director of Stocks & Realty, said in evidence that the loan was repayable on demand. In effect, D.U.L. and Stocks & Realty were promised a net return of 15% on an investment of $3,500 which they did not have to provide out of their own resources, as an inducement to become the controlling shareholders of Securities & Management. After the enactment of the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 (Cth) some further steps were taken to ensure that Securities & Management would remain a public company, although it seems that it was not necessary to take those steps to achieve that end. On 18 February 1966 Charles J. Berg & Associates sent a circular to all the shareholders in Securities & Management, except D.U.L. and Stocks & Realty, offering, on behalf of Eaton Investment Pty. Limited, to buy all their

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shares at 70¢ per share. The circular stated that the flow of income to Securities & Management had dried up because all the companies in which it held investments in redeemable preference shares had redeemed their shares and that it would be in the best interests of all individual shareholders that they should dispose of their shares. This offer was accepted by all the shareholders to whom it was addressed, except the trustees of the estate of a deceased shareholder who held 200 shares, and on 5 May 1966 12,700 shares in Securities & Management were transferred to Eaton Investment Pty. Limited. On 29 June 1966 Eaton Investment Pty. Limited transferred 4,000 shares to E. A. Greenwood Limited, 4,000 shares to Epstein & Co. Limited and 4,700 shares to Kolotex Holdings Limited, at a consideration of 75¢ per share. All these transferees were public companies, and each was induced to take up the shares by an arrangement similar to those made with D.U.L. and Stocks & Realty. In each case, at about the time the shares were transferred, Securities & Management made to a subsidiary of the transferee a loan bearing 5% interest of a sum equal to the purchase price of the shares or thereabouts; however, according to the evidence of Mr. Borough, in 1966 there was no certainty that a dividend of 20% would continue to be paid. On 6 November 1967 the 200 shares belonging to the deceased estate were transferred to Kolotex Holdings Limited. On 19 March 1968 Epstein & Co. Limited, which had fallen into financial difficulty, transferred its shares to Osti Holdings Limited. The moneys lent to Epstein & Co. Limited were repaid and a similar loan was made to a subsidiary of Osti Holdings Limited. Since that date the shareholders of Securities & Management have been D.U.L. (7,000 shares), Stocks & Realty (7,000 shares), Kolotex Holdings Limited (4,900 shares), E. A. Greenwood Limited (4,000 shares) and Osti Holdings Limited (4,000 shares). All of these companies, except Stocks & Realty, are now and have at all material times been public companies whose shares are listed on the stock exchange. Until 1965 the shares of Stocks & Realty were listed on the stock exchange but since that year Stocks & Realty has been a wholly-owned subsidiary of Stocks & Holdings Limited which was and is a public company whose shares are listed on the stock exchange.

Two of the directors of Securities & Management, Messrs. Berg and Tribe, gave evidence that they knew of no arrangement between Securities & Management and any of the public companies that acquired shares in Securities & Management as to the beneficial ownership of those shares or as to any dividends they might produce or, Berg added, as to the voting power they conferred or as to the distribution of capital on a winding-up or redemption of capital. This evidence was supported as to D.U.L. by the evidence of Messrs. Somervaille and Strauss, as to Stocks & Realty by the evidence of Mr. Graf, as to Kolotex Holdings Limited by the evidence of Mr. Strauss and as to E.A. Greenwood Limited and Osti Holdings Limited by the evidence of Mr. Kirby.

Before 1966 the procedure followed to give the desired taxation advantage to the clients of Charles J. Berg & Associates had involved the issue to Securities & Management of redeemable preference shares in the various private companies associated with those clients but in 1966 a new method was devised. On 8 June 1966 Securities & Management resolved to arrange for the incorporation of a number of subsidiary companies each of which was to have a paid-up capital of ten shares of $1 each fully paid and all of which (after the transfer of a subscriber's share) were to be registered in the name of Securities & Management. Pursuant to this resolution more than twenty subsidiaries (including Talford, Steed and Cargill) were incorporated in June 1966. Since that month Securities & Management has held the ten ordinary shares in the capital of Talford, Steed and Cargill and the directors of these companies have been Messrs. Steiner and Stanton (and in the case of Cargill, since 1969, Mr. Tribe also). The directors of Securities & Management since November 1966 have been Messrs. Tribe, Steiner and Stanton.

Finance Facilities had been incorporated on 8 June 1956 as an investment company for Jorge Yacobi and the members of his family which included Paul Strasser. One hundred thousand shares of $2 each in Finance Facilities were issued and at all material times most of these shares were held by three private companies (including Assets Holdings Pty. Limited (``Assets'') and P. & S. Holdings Pty. Limited (``P. & S.'')) controlled by members of the Yacobi family, although in addition 840 shares were held by Messrs. Tribe and Strasser as trustees for a superannuation fund and 167 shares were held by Mr. Tribe individually. By April 1967 Finance Facilities and prospered and the Yacobi family faced the usual taxation difficulty: if the profits made by Finance Facilities were distributed they would attract tax in the hands of the recipients and if they were not distributed they would attract additional tax under Div. 7. It was, therefore, decided to adopt the scheme which Charles J. Berg & Associates had devised to prevent this result.

On 20 April 1967 the articles of association of Finance Facilities were altered so as to increase the nominal capital of that company from $200,000 to

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$220,000 by erecting an additional 6,000 ordinary shares of $2 each and 4,000 redeemable preference shares of $2 each divided into 1,000 class A redeemable preference shares and 3,000 class B redeemable preference shares. The articles, as amended, provided that so long as any redeemable preference shares should remain issued no dividend should be payable in respect of any other shares in the company and that the redeemable preference shares until redeemed should confer on their holders the right to receive the whole of the dividends, including interim dividends, that may be declared. The directors were empowered to declare what portion of any dividend should be payable in respect of class A and class B redeemable preference shares respectively. The redeemable preference shares were in a winding-up or on a reduction of capital entitled to rank as regards the return of capital in priority to all other shares in the capital of the company but did not confer the right to any further participation in the distribution of assets. The redeemable preference shares carried no voting rights. They might at any time prior to 1 April 2125 be redeemed on seven days' notice.

On 21 April 1967 Talford applied for 3,000 class B redeemable preference shares and Steed applied for 1,000 class A redeemable preference shares in Finance Facilities and on 24 April 1967 shares were allotted with their applications. On 21 April 1967 Assets made a loan to Talford of $9,760 and P. & S. made a loan to Steed of the same amount. In each case the loan was secured by debenture. Inter alia, each debenture provided that the advance should be repayable on three months' notice and should carry interest at the rate of 4%. By cl. 4 of each debenture the borrowing company gave a floating charge over the whole of its undertaking and property. By cl. 13 of each debenture it was provided that the debenture holder should until the redemption of the deb-Board of Directors of the borrowing company and provision was made with regard to the appointment and removal of such directors. Clause 14 of each debenture provided that in consideration of the advance made by the debenture holder to the borrowing company the debenture holder or such person as the debenture holder might nominate should have the option prior to the redemption of the debenture at any time and irrespective of whether notice of intention of repayment had been given by the borrowing company of taking up at par ordinary shares in the capital of the company of a nominal value equal to the amount secured by the debenture in exchange for and in full satisfaction of the debenture. The clause went on to provide that the option should be exercised by notice in writing in a specified form and it contained the following provision -

``(b) Upon exercise of the option by the debenture holder or its nominee the company shall forthwith allot the shares which are the subject of the option to the debenture holder or to such person or corporation as specified by the debenture holder in the said notice and such allotment shall take effect immediately upon allotment thereof or upon the expiry of three days from the delivering or posting of the notice of exercise of the option (whichever is the earlier date) provided always that no such notice shall be delivered or posted and no such allotment or issue of shares shall be made between the first day of June and the second day of July (both dates inclusive) in any one year.''

The clause went on to provide that the exercise of the option should be valid notwithstanding the appointment of a receiver or liquidator that shares allotted pursuant to the exercise of the option should be issued as fully paid and should rank pari passu with existing shares, that the option should lapse forthwith upon redemption of the debenture and that upon surrender of the debenture in exchange for the issue of shares pursuant to the option the borrowing company should pay to the debenture holder a proportionate part of the current interest due upon the debenture calculated up to the date of allotment of the shares By cl 15 each borrowing company was required until redemption of the debenture, to reserve and keep available for the purpose of the debenture a sufficient number of shares to satisfy the requirement of the option.

On 28 April 1967 Finance Facilities declared a dividend of $20,000 payable as to $15,000 to Talford and $5,000 to Steed. On 11 April 1968 Finance Facilities declared a dividend of $56,000 payable as to $42,000 to Talford and $14,000 to Steed. This dividend was paid before 30 April 1968

During the year ended 30 June 1968 Talford received from various private companies including Finance Facilities dividends totalling $120,000. After payment of a dividend of $200 to Securities & Management its unappropriated profits (including the balance from previous years) amounted to $134,096. In that income year Talford invested $134,100 in the purchase of 67,050 redeemable second preference shares of $2 each in Parkes Development Pty. Limited. During the same year Steed received from private companies including Finance Facilities dividends totalling $40,000 and, after payment of a dividend of $200 to Securities & Management, had left unappropriated profits of $43,751. It invested $44,700 in the purchase of 22,350 redeemable second preference shares of $2 each in Parkes Development Pty. Limited. The evidence as to the

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control of Parkes Development Pty. Limited is not full and complete but it appears that it was a company associated with the Yacobi interests and that Strasser was a director of it. Under the articles of Parkes Development Pty. Limited the redeemable second preference shares conferred on the holders thereof no right to vote and no right to any dividend but in the event of a winding-up or a reduction of capital they entitled the holders to repayment of capital in priority to all other shares, excepting preference and redeemable preference shares. The articles provided that these shares might be redeemed on seven days' notice at any time before 30 September 2012.

Cargill has played for the Hitter family a similar role to that which Talford and Steed played for the Yacobis. On 21 April 1967 Hitter Foundation Pty. Limited lent $9,750 to Cargill on the security of a debenture in terms very similar to those of the debentures given by Talford and Steed; the only difference appears to be that under the debenture given by Cargill the right of the debenture holder to appoint directors of the borrowing company is not limited to two but extends to the appointment of such number as may be necessary from time to time to constitute a majority of directors. Hitter Foundation Pty. Limited at the material time was a company of which John Hitter was governing director and in which John Hitter (Management) Pty. Limited (as trustee for the children, wife and brother of John Hitter), John Hitter and his wife, Mrs. Toby Hitter, were shareholders. During the year ended 30 June 1968 Cargill received dividends totalling $509,490 from a number of private companies controlled by the Hitter family. In that income year it distributed by way of dividend $200 to Securities & Management, and made to another company, Bor Lend Pty. Limited, substantial advances including an interest-free loan of $476,500.

The evidence shows that a dividend of $200 was each year declared in favour of Securities & Management not only by Talford, Steed and Cargill, but also by the various other subsidiaries of Securities & Management which were used by other persons for tax purposes. There was no evidence that this was the result of any agreement. Mr. Tribe said that he knew of no arrangement between Securities & Management, on the one hand, and Talford or Steed, on the other, as to the beneficial ownership of the shares which were allotted by those companies to Securities & Management or as to the beneficial ownership of any dividends. He further said that he knew of no arrangement restricting the amount of any dividends which Talford or Steed might declare, although he said that his own understanding was that all that Securities & Management would receive was a dividend which was reasonable in terms of the service which it was providing. Mr. Tribe said that before the shares were allotted by Finance Facilities to Talford and Steed he had some discussions with Strasser but that there was no discussion as to the amount of the dividends which Talford and Steed might pay to Securities & Management. He thought that Mr. Borough (who was a member of Charles J. Berg & Associates) or Mr. Stanton might have handled matters of this kind. Mr. Borough said that he explained to a number of clients of the firm that the dividends payable to Securities & Management would be approximately $200 and that the dividends and share capital would be beneficially owned by Securities & Management. However, so far as Finance Facilities was concerned, he thought that Mr. Strauss would probably have been the person who had the discussions with Mr. Strasser. Mr. Strauss, however, said that he did no more than arrange introductions between the parties. Mr. Stanton was not called as a witness. No person who represented the Yacobi interests in any discussions of this kind gave evidence; Strasser had left Australia for overseas a few weeks before the hearing (although it was suggested on behalf of the Commissioner that his visit might have been postponed in view of the importance of the case) and Yacobi lives in Spain. No evidence was given by any person who had represented the Hitter group in any discussions in relation to the formation of Cargill and no explanation was given of the failure to call any such person.

For the scheme devised by the accountants to succeed, and for Talford, Steed and Cargill to escape tax under Div. 7 and to be entitled to a rebate under sec. 46 of the Act in respect of the whole of the private company dividends included in their respective assessable incomes, it was, as I have indicated, necessary that these companies should not be private companies within the meaning of the Act. The case for the taxpayers is that during the income year in question Securities & Management was ``a subsidiary of a public company'' as defined in sec. 103A(4) of the Act and, therefore, because of the provisions of sec. 103A(2)(d)(v), itself a public company for the purposes of Div. 3, and that Talford, Steed and Cargill were subsidiaries of Securities & Management and thus, as subsidiaries of a public company, were themselves public companies for the purposes of the division. If this is so they were not private companies for the purposes of that division (sec. 103A(1)) or within the meaning of the Act (sec. 6(1), definition of ``private company'').

Sec. 103A(4) provides as follows -

``(4) For the purposes of this section, a company is a subsidiary of a public company in

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relation to the year of income if, at the end of the year of income, one or more companies that are public companies for the purposes of sub-sec. (1) of this section in relation to the year of income but none of which is a company referred to in paragraph (c) of sub-sec.(2) of this section -
  • (a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company;
  • (b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company;
  • (c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and
  • (d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding up, or of a reduction in the capital, of that company''

Putting aside for the moment sec. 260, on which the Commissioner relies, it is clear that Securities & Management was, in relation to the year of income ending on 30 June 1968, a subsidiary of a public company within this definition. On 30 June 1968, all of its shares were owned by five companies, all of which were public companies for the purposes of sec. 103A(1). and none of which was a company referred to in sec. 103A(2)(c). At that date, those companies were, by reason of their ownership of the shares, capable of controlling the entire voting power in Securities & Management, and would have been entitled to receive any dividends paid by Securities & Management and to receive the whole of any distribution of capital of Securities & Management in the event of a winding-up or a reduction of capital. Their entitlement was beneficial as well as legal. In other words, Securities & Management answered the description contained in sec. 103A(4).

The question also arises whether, again putting aside sec. 260, Talford, Steed and Cargill were subsidiaries of Securities & Management within sec. 103A(4). Ostensibly in each case all the conditions of sec. 103A(4) were satisfied. However, the Commissioner submits that it should not be held that they were subsidiaries of Securities & Management within that subsection, for two reasons. In the first place, the Commissioner relies on matters of fact. He submits that the evidence led for the taxpayers on this issue is quite unsatisfactory and that the burden which sec. 190(b) of the Act casts on a taxpayer of proving that the assessment is excessive has not been discharged. It is obvious that the fact that a dividend of $200 per annum was regularly paid to Securities & Management by all the companies concerned could not have been the result of mere coincidence. Theoretically, Securities & Management could have used its power to control Talford, Steed and Cargill by causing those companies to declare dividends large enough to absorb all their profits. Any such diversion of funds from the control of the Yacobi and Hitter interests respectively into other hands was, of course, no part of the arrangement between the parties, and in deciding whether or not to embark on the scheme the representatives of the Yacobis and the Hitters must have been concerned to ensure that there would be some limit on the size of the dividends that would be declared. In the circumstances, it cannot be believed that there was no discussion as to the amount of dividend that the subsidiaries of Securities & Management would declare. The failure of the taxpayers to call as a witness anyone who engaged in any discussion on the subject, or to account convincingly for the absence of any such witness, would be a circumstance in favour of drawing any inference adverse to the taxpayers which the facts given in evidence support:
Jones v Dunkel (1958-59) 101 C.L.R. 298 at pp. 308, 312 and 320-1. It is accordingly submitted on behalf of the Commissioner that it should be inferred that there was an agreement pursuant to which Securities & Management held the shares in Talford. Steed and Cargill for the benefit of others, and that the taxpayers have failed to discharge the burden that lies upon them of showing that Securities & Management was beneficially, as well as legally, entitled to the shares and to the rights which they conferred. However, the failure of the taxpayers to call any evidence of this kind does not justify me in drawing an inference which would be contrary to the weight of the evidence. It is undisputed that the purpose of the creation of Talford, Steed and Cargill, and of the acquisition by Securities & Management of all their issued shares, was to render them subsidiaries of Securities & Management for the purposes of sec. 103A(4). The whole object of what was done would be frustrated if Securities & Management did not have the beneficial, as well as the legal, rights which the shares conferred, and there is no justification for inferring that this carefully prepared scheme contained an element which would have rendered it futile. The fact that debentures were given which enabled the debenture holders to obtain control of Talford, Steed and Cargill supports the view that until the power given by the debentures was

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exercised the control remained in Securities & Management. It is true that the powers given by the debentures might not have enabled the debenture holders to assume control in time to prevent a declaration of dividends in favour of Securities & Management, and this circumstance does afford a point of distinction from
F.C. of T. v. Casuarina Pty. Limited. 71 ATC 4068 whose facts are otherwise similar. If Securities & Management had used its powers to cause its subsidiaries to declare dividends which were thought to be excessive, no doubt action would have been taken under the debentures, the scheme would have come to an end and the reputation of the members of Charles J. Berg & Associates would have suffered. It may well be that the clients of the accountants trusted them, and were content to rely on the fact that from a practical point of view it was most unlikely that the scheme would be abused. However, if they sought protection in a binding agreement, I find it impossible to infer that the agreement took the form of an undertaking that any dividends declared, or any capital distributed on a winding-up or distribution of capital, would be held in trust. The representatives of the Yacobi and the Hitter interests would have been likely strongly to oppose any suggestion that dividends be declared in excess of the amount which it was intended that Securities & Management should retain, or that the companies should be wound up, or should have their capital reduced, while Securities & Management continued to hold all the issued shares. The probable inference is that there was either an agreement or an understanding that excessive dividends (i.e. dividends greater than an agreed amount, or an amount which could be regarded as representing reasonable remuneration for services rendered) would not be declared. There seems to me no reason to doubt that it was intended that Securities & Management should be beneficially entitled to receive whatever dividends were declared, and in fact the evidence shows that the dividends of $200 a year were received by Securities & Management and retained by it for its own purposes. Notwithstanding the legitimate criticism of the failure of the taxpayers to call knowledgeable witnesses, and notwithstanding the fact that the onus lies on the taxpayers of showing the assessments to be erroneous, I cannot infer that there was any arrangement that would have deprived Securities & Management of the beneficial interests in the shares held by that company in Talford, Steed and Cargill.

The second argument advanced on behalf of the Commissioner is that, even if it be accepted that the shares in Talford, Steed and Cargill were beneficially owned by Securities & Management, nevertheless the tests laid down by sec. 103A(4) have not been satisfied. The Commissioner submits, rightly in my opinion, that sec. 103A(4) requires one to look, not merely at the company's share register, but at all the circumstances, in determining whether the beneficial ownership and beneficial entitlement referred to in the subsection exists. He further submits that in the present case the existence of the debentures meant that it could not be said that Securities & Management answered the requirements of paras. (b), (c) and (d) of sec. 103A(4). For convenience I shall deal with this argument in its relation to Talford, although what I say will also apply to Steed and Cargill. The Commissioner relies to some extent on the right given to Assets by cl. 13 of the debenture to have nominees on the Board of Talford, but this seems to me an irrelevant matter. Clause 13 did not give Assets the capacity to obtain control of the voting power in Talford within para. (b) of sec. 103A(4), which must mean the voting power attached to shares and not the voting power of directors. Stronger reliance is, however, placed on cl. 14 of the debenture under which Assets was entitled to require Talford to allot 9,750 shares in that company. When the allotment took effect, as it would no later than three days from the expiration of a notice given in accordance with cl. 14, Assets would, by reason of its beneficial ownership of those shares, have been capable of controlling Talford and would have been beneficially entitled to receive more than one-half of any dividends paid by that company and more than one-half of any distribution of capital in the event of the winding-up, or of a reduction in the capital, of that company. However the fact that Assets was able to obtain control of Talford in the future did not mean that Securities & Management was not capable of controlling the voting power of Talford at the end of the year of income. Section 103A(3) requires the position to be considered at the end of the year of income and at that time Securities & Management, by reason of its beneficial ownership of shares in Talford, was capable of controlling the voting power in that company. The decision in F.C. of T. v. Casuarina Pty. Limited, 71 ATC 4068 is decisive against the Commissioner on this point. Similarly the existence of the debentures did not render paras. (c) and (d) inapplicable. Those paragraphs are expressed in the subjunctive mood, not in the future tense; they do not require the Court to consider who would be entitled to dividends or to a distribution of capital at some date in the future but whether the public company in question would be beneficially entitled, at the end of the year of income, to receive the dividends or the distribution of capital on the hypothesis that dividends were paid or capital was distributed at that time. Again, the decision in F.C. of T. v. Casuarina Pty. Limited (supra) is fatal to the

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Commissioner's argument. If any dividends had been paid or any capital distributed at the end of the year of income in question, Securities & Management would have been beneficially entitled to it. It is not relevant to enquire whether or not it was likely that dividends would have been declared or a distribution of capital made.

I hold, therefore, that unless sec. 260 of the Act leads to a different result, Talford, Steed and Cargill have established that they were public companies within sec. 103A(2) (d)(v) and, therefore, not private companies within the meaning of the Act in relation to the relevant income year.

The Commissioner, however, submits that in each case there was an arrangement which had the purpose of defeating, evading or avoiding a liability to income tax and that sec. 260 renders those arrangements void with the result that in the circumstances that remain after the arrangements have been annihilated Talford, Steed and Cargill are seen to be private companies. It is submitted that sec. 260 operates at two levels. In the first place, it is said that the allotments of the shares in Securities & Management to the five public companies were made in circumstances which cannot be explained by reference to ordinary business dealing, but were made for the purpose of avoiding tax, and that if those allotments are treated as void Securities & Management no longer answers the description of a public company. The circumstances certainly showed that Securities & Management was determined to do all it could to ensure that the public companies should take up the shares, but it is quite impossible to regard the steps taken on behalf of Securities & Management to preserve its status as a public company as a means to avoid tax. Secondly, it is said that the allotment of shares by Talford, Steed and Cargill to Securities & Management must similarly be treated as void so that those companies are not to be regarded as subsidiaries of Securities & Management and, therefore, not to be regarded as public companies. This argument is similar to that rejected in F.C. of T. v. Casuarina Pty. Limited (supra), and that decision, which was argued after the present appeals were heard, completely governs this question. The allotments of shares in Talford, Steed and Cargill were made in the exercise of a right of choice recognised by the Act, and, on the authority of
W.P. Keighery Pty. Ltd. v. F.C. of T. (1956-57) 100 C.L.R. 66,
F.C. of T. v. Sidney Williams (Holdings) Ltd. (1956-57) 100 C.L.R. 95 and F.C. of T. v. Casuarina Pty. Limited (supra), are not rendered void by sec. 260.

It follows that Talford, Steed and Cargill have shown that they were not private companies within the meaning of the Act and that in the case of each of those companies the Commissioner should have allowed a rebate under sec. 46(2)(b) based on the full amount of the dividends included in its taxable income and that the assessments to additional tax under Div. 7 cannot be sustained.

It remains to consider the appeal by Finance Facilities. That company is a private company and was, therefore, not entitled to a rebate under sec. 46(2)(b) of the Act. It was allowed a rebate under sec. 46(2)(a) but submits that the Commissioner was bound to allow a further rebate under sec. 46(3). That subsection reads as follows -

``(3) Subject to the succeeding provisions of this section, the Commissioner may allow a shareholder, being a company that is a private company in relation to the year of income and is a resident, a further rebate in its assessment of the amount obtained by applying the average rate of tax payable by the shareholder to one-half of the part of any private company dividends that is included in its taxable income if the Commissioner is satisfied that-

  • (a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company;
  • (b) where the shareholder has paid, or may pay, a dividend during the period-
    • (i) commencing at the beginning of the year of income of the shareholder; and
    • (ii) ending at the expiration of ten months after that year of income,

      to a company, being a private company in relation to the year of income of the company in which the dividend was, or may be, paid, the company has not paid, and will not pay, a dividend during the period-

    • (iii) commencing at the beginning of the year of income of the company in which the dividend has been, or may be, paid by the shareholder; and
    • (iv) ending at the expiration of ten months after that year of income,

    to another private company; or

  • (c) having regard to all the circumstances, it would be reasonable to allow the further rebate.''

ATC 4090

The evidence clearly establishes that Finance Facilities did not pay any dividend during the period specified in sec. 46(3) (a) to any person, except Talford and Steed which I have held were not private companies. The Commissioner was, therefore, bound to be satisfied that the case fell within sec. 46(3)(a). In these circumstances, it is submitted on behalf of Finance Facilities that the Commissioner had no discretion to refuse to allow a further rebate. It is submitted that the word ``may'' in sec. 46(3) does not import a discretion, and that when the conditions specified in the subsection are satisfied the Commissioner is under a duty to exercise the power which the subsection confers. This argument is supported by particular reference to the provisions of para. (c) of sec. 46(3), which, although inapplicable to the present case, are said to provide a clue to the proper construction of the subsection. Para. (c) itself clearly requires the Commissioner to make a discretionary judgment as to whether it would be reasonable to allow a further rebate, but, it is said, if the Commissioner was satisfied that it would be reasonable to allow the further rebate, it is an unlikely construction of the subsection that it should permit him to exercise a further discretion, and disallow the rebate which he had decided ought in reason to be allowed. Therefore, it is said, it is intended that the Commissioner is bound to exercise his power to allow a further rebate once the condition of para. (c) is fulfilled, and the same conclusion ought to be reached in relation to paras. (a) and (b).

The word ``may'', in its natural meaning, is permissive or enabling only, and it lies on those who assert that there is an obligation to exercise the power conferred to show, as a matter of construction of the Act as a whole, that this is so: see
Julius v. Lord Bishop of Oxford (1880) 5 App. Cas. 214 and
Ward v. Williams (1954-55) 92 C.L.R. 496 at p. 505. Although the form of para. (c) does lend some force to the taxpayer's argument, it seems to me clear, upon the proper construction of sec. 46, that the power given by sec. 46(3) is discretionary. Subsection (3) deals only with private companies. By sub-sec. (2)(a) a private company ``is entitled'' to a rebate obtained by reference to one-half of the private company dividends included in its assessable income. The Commissioner has no discretion to refuse to allow the rebate provided by that subsection. On the other hand, sub-sec. (3) says that, in certain specified circumstances, the Commissioner ``may allow'' a private company a further rebate obtained by reference to one-half of the private company dividends included in its assessable income. The contrast between the words of the two subsections leads firmly to the conclusion that sub-sec. (3) confers on the Commissioner a discretionary power to grant a rebate and does not impose on him a duty to allow it when the circumstances mentioned in the subsection are satisfied. The Commissioner points to the facts that ``the prescribed period'' within which dividends must be paid to amount to ``a sufficient distribution'' within Div. 7, is defined by sec. 103(1) so as to include the ten months' period referred to in sec. 46(3), and that under sec. 105AA the Commissioner is given power to extend the period in which a company may pay dividends for the purpose of making a sufficient distribution in relation to the year of income. It is said that if sec. 46(3) confers no discretion, a taxpayer to whom an extension of time had been granted under sec. 105AA might obtain a rebate under sec. 46(3)(a) or (b) and yet make a distribution to a private company within the extended period and escape liability to additional tax under Div. 7, and that since sec. 46 and Div. 7 are obviously complementary, this is an unlikely result, even though it might in some cases be avoided by administrative action. However, the words of sec. 46 themselves make it clear that the power given by sub-sec. (3) is discretionary, and it is unnecessary to support this conclusion by this further argument.

Finally, it is submitted on behalf of Finance Facilities that the Commissioner has not properly exercised his discretion in the present case. The Commissioner has, without prejudice to the question whether he is obliged to do so, furnished a statement of the grounds on which the discretion was exercised. The statement reads -

``The Commissioner decided not to allow the further rebate provided for in Sec. 46(3) because he was of the view that even if and upon the basis that the conditions set forth in paras. (a) or (b) were met he had a discretion to refuse to allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of Sec. 46(3)(c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding liability to tax pursuant to the provisions of Div. 7 of the Act.''

The statement is somewhat ambiguously expressed, but it seems to me right to construe the concluding words as relating to the exercise of the discretion under paras. (a) and (b) as well as under (c). It is submitted on behalf of the taxpayer that sec. 260 deals exclusively with the consequences of

ATC 4091

tax avoidance schemes and that, if an alleged scheme is not avoided by sec. 260, the Commissioner is not entitled to consider its existence or base the exercise of his discretion under sec. 46(3) on the view he has formed about it. Of course, if the Commissioner does consider an extraneous matter in exercising his discretion, his decision is liable to review: see
Avon Down Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360. However, I cannot accept that it was the intention of the legislature that sec. 260 should operate as a fetter on the discretion given to the Commissioner by other sections of the Act, or that it should be wrong of the Commissioner in exercising his discretion to take into account the existence of a scheme to escape tax. In the present case the scheme was successful, and it is not right to call it ``a tax avoidance scheme'' if by that expression is meant a scheme within sec. 260. However, it seems to me that the Commissioner is entitled to consider the fact that, although a case comes within the words of para. (a) or para. (b) of sec. 46(3), it only does so because the parties have implemented a scheme for the purpose of ensuring that Div. 7 tax is not attracted, and to form the view that although the scheme was lawful and proper it was nevertheless an artifice designed to take advantage of a loophole in the Act, and acting on that view to refuse to allow a further rebate which the Act leaves within his discretion to allow or withhold. Once this conclusion is reached I can find no ground for holding that the Commissioner did not make a proper exercise of his discretion.

The appeal by Finance Facilities will be dismissed and the other appeals allowed.

ORDER:

In matter No. 11 of 1969 - Appeal dismissed with costs.

In matters Nos. 36 of 1969, 37 of 1969 and 33 of 1969 - Appeals allowed with costs. Assessments remitted to the Commissioner to be varied in accordance with the reasons for judgment.

In matters Nos. 24 of 1970, 25 of 1970 and 23 of 1970 - Appeals allowed with costs. Assessments set aside.

Costs of the parties to be taxed on the basis that the matters were heard together.

Usual order as to exhibits.


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