Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd.
Judges: Barwick CJMenzies J
Windeyer J
Owen J
Court:
High Court (Full Court)
Menzies J.: The appellant taxpayer is a company which has, at all times material, been a private company. Until 19 December 1966 its name was G.A. Cleary (N.S.W.) Pty. Limited. The Commissioner disallowed a deduction of $67,506 claimed by the taxpayer in its return of income for the year ended 30 June 1967. The claim was made under sec. 80 of the Income Tax Assessment Act for losses in previous years. The Commissioner disallowed the deduction because the taxpayer had not satisfied him, as is required by sec. 80A(1), that two of the five issued shares in the company throughout the year of income, i.e. 1966, were then beneficially owned by persons who, at all times during each year of loss, i.e. 1962, 1963, 1964 and 1965, were the beneficial owners of those shares.
In all the years of loss the company had but two issued shares. One was registered in the name of L.M. Cleary, the other in the name of C.B.J. Scutt. Mrs. Cleary was the beneficial owner of the first share; Mr. Scutt was not the beneficial owner of the second share. He held it either for Mrs. Cleary or for her husband, G.A. Cleary. Throughout the year of income the shareholding was as follows -
Mrs. Cleary : One share
Mr. Scutt : One share
Brian Hatch : Two shares
Noela Irene Hatch : One share
The Commissioner was not satisfied that the beneficial ownership of the shares, registered in the names of Mrs. Cleary and Mr. Scutt, had remained with the Clearys throughout the year 1966.
The taxpayer appealed and Walsh J. decided that the Commissioner's failure to be satisfied arose either because of some error of law or from taking some unidentified extraneous factor into account. His Honour's decision was, in substance, that, from the evidence before the court, it could be seen that the Commissioner had failed to discharge properly his statutory function according to law. Accordingly, his Honour set aside two assessments, one of primary tax and one of additional tax. The allowance of the deduction in question meant that there could be no additional tax but that the taxpayer was still liable for some primary tax. Accordingly, the assessment of primary tax was remitted for reassessment in accordance with the judgment of the court. There is no doubt that compliance with this direction would require the allowance of the deduction in the reassessment of primary tax.
One difficulty which the learned trial judge faced was in ascertaining what information the Commissioner had before him in disallowing the deduction claimed. He had, of course, the return which showed the shareholders in the company as at 30 June 1967. Presumably, he also had before him the record of an interview in February 1968 between an officer of the Taxation Department and Mr. and Mrs. Cleary. What else he had is a matter for conjecture.
Upon the hearing of the appeal the taxpayer provided a good deal of evidence relative to the circumstances in which a moribund company called G.A. Cleary (N.S.W.) Pty. Limited became a flourishing company called Brian Hatch Timber Co. (Sales) Pty. Limited. The Commissioner, however, called no evidence; nor had the taxpayer sought from the Commissioner any statement about the matter. It is desirable, before setting out shortly the effect of the evidence, to refer to the record of interview with Mr. and Mrs. Cleary which has already been mentioned.
It was not very informative. After a reference to the original issue of shares, it proceeded as follows -
``In 1962 the company got into financial difficulties and as far as either was able to remember the company went into voluntary liquidation in that year. The liquidator who was appointed was Mr. White, Public Accountant at Auburn. Sometime in 1963 the company was sold with the approval of Court, to Berry Motors of Rockdale and so far as Mr. Cleary remembers the purpose of the sale was to take advantage of tax losses. Neither Mr. nor Mrs. Cleary were able to recall whether they received any payments in respect of the sale, or if payment was received what happened to the payment. Also they were unable to recall whether
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they retained any interest in the company after the sale but said that for all purposes they lost all interest as they did not have any further dealings with the company or Berry Motors.''
The Clearys, moreover, said that they had no discussion with Berry Motors and they denied any knowledge of Brian Hatch Timber Co., or of Brian Hatch or Noela I. Hatch. The record ended as follows -
``Mrs. Cleary stated that she had not had any correspondence or other communication in respect of Brian Hatch Timber Co. and reiterated that all contact with this company ceased on sale to Berry Motors. In answer to my specific questions she denied having at any time entered into any arrangement, agreement or option to sell shares in Brian Hatch Timber Co. nor had she signed a blank share transfer in respect of that company. The reason given for these denials was her never having heard of Brian Hatch Timber Co. prior to the interview.''
Upon the appeal it appeared that the reference in the Cleary interview to the sale of the company sometime in 1963 was to a transaction arranged by one McMullen on behalf of Berry Motors Pty. Limited of which no further information was given. McMullen was not a witness and Mrs. Cleary's evidence did not go much beyond what had been said at the interview. She said -
``Q. Would you agree that in February 1968 when you had the interview with the officer from the Commissioner of Taxation you yourself were not sure exactly what had happened about the shares in the taxpayer company? A. It had been such a long time ago and I was surprised to find I was called in about it.
Q. Would you agree that at that time your understanding was that the taxpayer company had been sold to some people who were prepared to buy it in terms of making use of the tax losses? A. Yes.
Q. And so far as you understood at that time, you had ceased to have any interest in the company? A. That is right.''
She also said that, before 1968, the shares were still hers.
So far as appears, nothing of importance happened until 5 December 1966 when Mc.Mullen was given proxies from Mrs. Cleary directly and Mr. Scutt indirectly to vote at meetings of the company. On the same day Mrs. Cleary tendered her resignation as a director of the company.
The 19 December 1966 was an eventful day. An agreement was made between Berry Motors Pty. Limited and Grecher Pty. Limited, which was a Brian Hatch company. Under that agreement Grecher Pty. Limited paid Berry Motors Pty. Limited the sum of $11,251, which was three and four pence in the pound of the amount of the company's losses calculated to be deductible for income tax purposes. This sum was adjustable according to the amount actually allowed by the Commissioner as deductible. Clause 4 was as follows -
``4. PRIOR to payment of the sum of $11,251 Berry will: -
(a) Arrange for the issue of Three (3) shares at par to Grecher or its nominee
(b) Ensure that all necessary steps have been taken to terminate the Official Management of the Company
(c) Arrange a General Meeting of the shareholders of the Company at which Meeting: -
(i) New Directors being nominees of Grecher will be appointed;
(ii) The present Directors will tender their resignations as Directors;
(iii) The present Secretary of the Company will retire.''
Just how ``Berry'' would perform these undertakings was not revealed. The performance of (a) and (c), however, depended upon the Clearys. To this the Clearys did not refer.
It was also agreed that Berry Motors Pty. Limited would assign to Grecher Pty. Limited the debts originally owing by the
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company to creditors who, as parties to a deed of arrangement, had assigned their debts to either Berry Motors Pty. Limited or McMullen.On 19 December there was also a meeting of the shareholders of the company at which the foregoing undertakings were substantially performed with the help of the Clearys. McMullen, as proxy for Mrs. Cleary and for Mr. Scutt, was there; Brian Hatch was there by invitation, as was his accountant, Harold Levy. Applications, as follows, for the allotment of shares were approved:
Brian Hatch : Two
Noela Hatch : One
It was resolved that Brian Hatch and Noela Hatch be appointed directors of the company. Following the meeting notice was given to the Registrar of Companies that the company's name had, by special resolution, been changed to Brian Hatch Timber Co. (Sales) Pty. Limited.
After the events of 19 December 1966 the Clearys apparently dropped out of the picture altogether until 21 March 1968 when the two original shares were irregularly transferred to Brian Hatch, and Mrs. Cleary to her surprise, received $25 for the shares. I say the transfer was irregular because it appears that the transfer of the shares was signed by Mrs. Cleary alone. Mr. Scutt was not a transferor. In the meantime the Clearys received no notice of meetings, no accounts, no information whatever. They were not treated as shareholders; they were entirely disregarded. During the period between 19 December 1966 and 30 June 1967 the company carried on successfully as Brian Hatch Timber Co. (Sales) Pty. Limited and was run by, and on behalf of, the Brian Hatch interests. Its sales by 30 June 1967 had totalled $527,616.34. Of this successful trading it seems that neither Mr. nor Mrs. Cleary was told anything or knew anything.
In the course of his evidence upon the appeal Brian Hatch said -
``Q. Your company paid $11,251 for the structure of the taxpayer and the assignment of debts owing by the taxpayer? A. That is correct.
Q. And at the time you paid that money those debts, apart from what could be done to use the tax loss, were worthless? A. Apart from what could be done to use the tax loss, yes.
Q. This is a company in which you were buying shares at the time you entered into this transaction which was simply a bare structure; it had no assets and it had liabilities which had been affected to some extent by a scheme of arrangement? A. I had been advised, of course, that there was some advantage to me in acquiring this company structure because of the accumulated tax losses.''
When questioned about the risk he was taking in putting business into a company in which he would control but 60% of the shareholding, he said that he recognised that there was some risk but until the company's debts, which had, in effect, become owing to him, were paid, the company would not be of value to others and that it was in the interest of Mrs. Cleary, as a debtor of the company, not to interfere with what he was doing. He also said that, although the two outstanding shares were purchased on his behalf in 1968 for $25, that was the work of his accountant of which he knew nothing. It occurred after he had fulfilled his purpose by obtaining payment of the debts out of successful trading and exhausting the loss deductions.
A comparison of the evidence upon the appeal with what it seems was known to the Commissioner reveals additional matter bearing both for and against a finding that the Clearys' beneficial interest in the two shares continued. The position of the company as a debtor of the Hatch interests unquestionably secured the position of those interests as against the minority shareholders and gave force to Mr. Hatch's contention that, in order to secure the advantage that he was seeking, he had to run but a small risk in not controlling those shares. The same was no doubt true of the fact that G.A. Cleary was, by the articles of association - which were not altered - governing director for life. On the other hand, Mr. Hatch acknowledged that he was paying $11,251 for the ``structure of the company and the assignment of debts''. It is not apparent what could have
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been meant by acquiring the structure of the company if the words did not cover the acquisition of the issued shares.It is not, however, necessary to arrive at any conclusion about the effect and weight of the evidence in relation to what was actually involved in the acquisition of the structure of the company. The evidence as a whole is important only insofar as it bears upon the question whether the Commissioner, in disallowing the deduction claimed, had failed to discharge his statutory function according to law. With regard to that problem the evidence seems to me to have but little significance.
I do regard it as unfortunate that the basis for the Commissioner's not being satisfied of what was requisite for allowing the deduction claimed was not revealed. It seems to me that a taxpayer, in the position of the appellant, might properly have inquired from the Commissioner why he was not so satisfied. Such an inquiry would no doubt have been answered. Here, however, there was nothing of that sort, so that the taxpayer's case must depend upon showing that, in not being satisfied, there was undisclosed error on the part of the Commissioner. This is the central problem which his Honour faced and which he answered in favour of the taxpayer, principally because of his conclusion that the statement of the Clearys ``could not support a conclusion either that there had been, or that there might have been, a disposition by Mrs. Cleary (or by Mr. Cleary if he had been thought to have any beneficial interest in either of the shares) of the beneficial ownership or of any rights attached to them''.
It is at this point that I have, with respect, reached a different conclusion. If the statement ``that the company was sold'' means that the shares were sold, that would end the matter, and for my part I have difficulty in attaching any other meaning to that statement, particularly in the light of the statement that they could not recall whether they had retained any interest in the company after the sale. Furthermore, the Clearys putting the ``sale'' in 1963, and their failure to remember whether they received any payment in respect of the sale, could inspire but little confidence in their reliability. Their insistence that they knew not Hatch seems to me unimportant. They were dealing with McMullen and, without knowing what was arranged with him, it would be difficult to form any positive conclusion about the vital transaction which they referred to as the sale of the company. The Commissioner, however, did not have to reach any positive conclusion, and, in particular, it was not necessary for him to come to any conclusion about what had happened to the beneficial ownership of the shares. It was for the taxpayer to satisfy the Commissioner and if, without error, he was left in doubt whether or not they had disposed of their beneficial interest the taxpayer failed. Doubt about the Clearys' transaction with McMullen would warrant misgiving about their continued beneficial ownership of the shares. In
Avon Downs Proprietary Limited
v.
F.C. of T.
(1949) 78 C.L.R. 353
,
Dixon
J., at p.362, after referring to circumstances which, it was claimed, would remove doubt, observed
-
``When the shoe was found to pinch, the Commissioner was invited to adopt the contrary view and to do so on the faith of explanations which, however circumstantial, were necessarily ex parte. I do not know why he must be taken to have been filled with confidence in the later version, why he must be assumed to have entertained no doubt that the earlier version had no justification in the actual facts or why he must be taken to be reasonably satisfied that he had been told everything and there was no further fact which would show that before 30 June 1944 the position had become such that all parties would have been precluded from denying that the purchasers were `members'. In the circumstances a commissioner can hardly be considered unreasonable if he fails to rid himself altogether of misgivings and refuses to be satisfied that the issue is established.''
In this case I am satisfied that the Commissioner could, on the Clearys' own statement, have, not improperly, failed to be satisfied that they had retained the beneficial interest in the two shares after the events of
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December 1966. In all the circumstances an attitude of wise scepticism was quite consistent with the performance of his statutory duty.Accordingly, the Commissioner's disallowance of the deduction claimed ought not, I think, to have been set aside.
Although this conclusion disposes of the appeal there was a further matter of law in issue at the hearing of the appeal to which I think I should refer. It concerns the meaning and application of sec. 80B(5) of the Act.
It seems that, upon the appeal, the Commissioner relied upon this sub-section to support the assessment under challenge. As to this Walsh J. said -
``I have said that reference was made at the hearing to sec. 80B(5). But I am of opinion that there is not, on any view of the facts proved before me (or of any part of those facts considered in isolation from the rest of the facts), any basis for a finding in relation to the two shares that Mrs. Cleary entered into a contract, agreement or arrangement or granted a right, power or option of the kind described in that provision.''
It seems to me that it is a condition of the Commissioner's power under sec. 80B(5) that there is identity between beneficial ownership in the year of loss and beneficial ownership in the year of income as required by para.(a) thereof. That condition was not fulfilled here. The company failed to satisfy the Commissioner of that identity and he assessed on that basis. Accordingly, the power conferred by sec. 80B(5) could not save the assessment for no more appeared than that, when assessing, the Commissioner was not satisfied that such identity existed. If this had been due to error there would have had to be a reassessment.
It does seem to me, however, that a further point arises for, if the Commissioner were to be told by the court that such identity did exist, it would, I think, be necessary to frame the order so as to give the Commissioner the opportunity, in reassessing, to treat the shares as not having been so beneficially owned if the other conditions warranting the exercise of that power exist. Here I set out sub-sec. (5) of sec. 80B -
``(5) Where -
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as `the relevant time') during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty AA of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,
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the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.''
The conditions so expressed require consideration.
As I have said, (a) would be fulfilled if, in accordance with the direction of the Court, the Commissioner were to be satisfied of the identity of the beneficial ownership there referred to.
In deciding whether the condition in (b) could be fulfilled, it is necessary to examine the significance of the grant of proxies on 5 December 1966. The problem is whether the giving of a proxy by a holder of shares is the grant of a right or power that directly or indirectly related to ``any rights carried by those shares or the exercise of any such rights''. The proxies given here simply appoint McMullen ``as my proxy to vote for me and on my behalf at the Ordinary or Extraordinary General Meetings of the Company''. To vote is, of course, to exercise a right carried by shares. The question is whether appointing a proxy to vote is a granting of a power relating to the exercise of such a right. Voting by proxy is the privilege of a member, but, once a proxy is given and so long as it remains unrevoked, the person holding the proxy may speak at a meeting, demand a poll and vote upon a poll. By virtue of a proxy given to him a person has, therefore, powers in relation to the exercise of rights carried by the shares in respect of which the proxy has been given. This seems to me to be sufficient to bring the giving of a proxy to vote within sec. 80B(5)(b)(iii).
It has next to be considered how the condition expressed in sec. 80B(5)(c) may be fulfilled. This is a difficult provision. It seems to me that the usual way in which a company does take into account a loss that the company had incurred in a previous year is by making profits from which such a loss can be deducted. It is true that there is no right to a deduction unless there is substantial continuity of ownership of the shares in the company as required by sec. 80A. However, an arrangement to secure conformity with the requirements of sec. 80A(1) does not itself enable a company to take a previous loss into account. The simplest instance of such conformity would be that the beneficial ownership of all the shares remained unchanged. Here I do not doubt that the proxies were obtained to enable the company to become one of the Brian Hatch group of companies and to carry on business profitably. If it were to be assumed, as I think it must for the purposes of sec. 80B(5), that the Clearys retained the beneficial ownership of the two original shares, then it could only be by the use of the proxies that the Brian Hatch interests could take control of the company. I would therefore be prepared to find that the proxies were taken for the purpose of enabling the company to use the tax losses. However, this is not the exact problem which sec. 80B(5)(c) poses. The problem is whether the proxies were granted for that purpose. It does appear from their statements that the Clearys were aware that ``the purpose of the sale was to take advantage of tax losses''. The purpose of Mrs. Cleary and Mr. Scutt in giving the proxies may have been for the same purpose. If that were so the condition expressed in sec. 80B(5)(c) would, I think, be fulfilled.
The result of this consideration of the meaning of sec. 80B(5), and its possible application to the facts of this case, satisfies me that, in this case, it was necessary to allow the Commissioner, in reassessing, to consider the possible application of sec. 80B(5). If it applied and the Commissioner exercised the discretion conferred upon him the loss would not be an allowable deduction notwithstanding the sufficient identity of the beneficial interests at the two times specified. Accordingly, had I been of the opinion that the Commissioner was in error in not being satisfied as provided by sec. 80A(1), the order made for reassessment should have left open the possible application of sec. 80B(5) and it would therefore have been going too far to direct the Commissioner, in reassessing, to allow the deduction claimed. Although the meaning and application of sec. 80B(5) was argued, my earlier conclusion makes it unnecessary to come to a final conclusion upon the matters which I have just discussed. What I have said, therefore, about sec. 80B(5), is tentative rather than final.
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Because of my conclusion that the Commissioner was not shown to have been in error in not being satisfied as provided by sec. 80A(1), I would allow the appeal and confirm the assessments.
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