Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd.

Members: Barwick CJ
Menzies J
Windeyer J

Owen J

Tribunal:
High Court (Full Court)

Decision date: Judgment handed down 7 January 1972.

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Owen J.: In these two appeals the Commissioner of Taxation seeks to have set aside orders made by Walsh J. in appeals brought by the taxpayer, a private company, against assessments made by the Commissioner for the year ended 30 June 1967. In its return for the year in question the taxpayer claimed a deduction of $67,506 representing losses incurred in prior years during which it had carried on business under the name of G.A. Cleary (N.S.W.) Pty. Ltd. This claim was disallowed by the Commissioner and the adjustment sheet stated that the deduction claimed ``was not allowed in terms of sec. 80A(1) of the Income Tax Assessment Act ''. In the result the taxpayer was assessed on a taxable income of $67,836. The second assessment was for an amount of $12,209 representing tax assessed on undistributed profits under Div.7 of the Act, the amount of those undistributed profits being determined after the disallowance of the deduction claimed for past losses.

On the appeal against the assessment to primary tax, Walsh J. upheld the appeal, set aside the assessment and remitted the matter to the Commissioner so that tax might be reassessed on the basis that the taxpayer was entitled to be allowed the deduction of $67,506 claimed by it. His Honour also upheld the appeal against the assessment of undistributed profits tax since the result of allowing the deduction on the first appeal was that no undistributed profits tax would be payable.

I go now to matters arising before us on the appeal to us against his Honour's decision on the taxpayer's claim that it should have been allowed the deduction of $67,506.

Section 80A(1), so far as material, provides that losses of previous years are not, in the case of a company, to be taken into account for the purposes of sec. 80 unless

``(a) the company satisfies the Commissioner;

(b).....

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

(c) the right to exercise not less than two-fifths of the voting power in the company;

(d) the right to receive not less than two-fifths of any dividends that may be paid by the company; and

(e) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the 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 rights of those kinds.''

Having regard to the fact that the adjustment sheet showed that the Commissioner had disallowed the taxpayer's claim to deduct previous years' losses which had ``not been allowed in terms of sec. 80A'', it appears that it had failed to satisfy the Commissioner that at all times during the year of income ended 30 June 1967 shares in the company carrying between them the rights set out in paras.(c), (d) and (e) of sub-sec. (1) of the section ``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 rights of those kinds''. It was not disputed that at all times during the four years up to and including the year ended 30 June 1966 during which the losses were incurred by the taxpayer (then carrying on business as G.A. Cleary (N.S.W. Pty. Ltd.), two shares only had been issued. One of them stood in the name of a Mrs. Cleary and one in the name of a Mr. Scutt. From the taxpayer's income tax return for the year ended 30 June 1967 it appeared that during that year three additional shares had been issued, two of them standing in the name of a Mr. Hatch and one in the name of Noela Hatch.

On the appeal to Walsh J., it was for the taxpayer to show that the assessment was wrong and the onus lay upon it to establish that, on the material before the Commissioner, he had failed to address himself to the question which the sub-section formulates or had made some mistake of

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ATC 4012

law, or taken some extraneous reason into consideration or had excluded from consideration some factor which should have affected his determination (
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 , per Dixon J. (as he then was), at p.360). The taxpayer could, of course, have appealed to the Board of Review. Had he done so it would have been for the Board to decide whether on the material placed before it, it was satisfied that the taxpayer was entitled to the deduction claimed. The taxpayer, however, did not take that course nor does it appear to have taken any steps to ascertain what material was before the Commissioner in making his assessment or to enquire from him what matters he had considered in disallowing the deduction claimed or why he had failed to be satisfied about the state of the shareholding at the relevant times. Had this been done I have no reason to think that the Commissioner would not have paid due regard to a passage in the judgment of Barwick C.J. in
Giris Pty. Ltd. v. F.C. of T. (1969) 119 C.L.R. 365 at p.373 , in which his Honour said -

``... the Commissioner is under a duty in each case to form an opinion and the taxpayer is entitled to be informed of it, and upon the taxpayer's request, the Commissioner should inform the taxpayer of the facts he has taken into account in reaching his conclusion.''

That statement was made in the course of dealing with sec. 99A of the Act but it is, I think, equally applicable in cases arising under sec. 80A. Again, the taxpayer might have called the Commissioner or his appropriate officer as a witness in an endeavour to ascertain what matters he took into consideration in performing the task which sec. 80A places upon him or to produce to the Court the material which was before him when he made his assessment. None of these courses was adopted. Instead the taxpayer placed before Walsh J. oral and documentary evidence to show that at all material times not less than two-fifths of the issued shares in the taxpayer were in the same beneficial ownership. The only portion of this material, however, which was shown to have been before the Commissioner was the taxpayer's income tax return for the year in question and, I would assume, its earlier returns, and a report of an interview between Mr. and Mrs. Cleary and an officer of the Taxation Department, which had taken place in February 1968. That report was in the following terms -

``Mr. and Mrs. Cleary attended the office on 1st February for an interview on the matters raised by Sydney Office.

With regard to G.A. Cleary (N.S.W.) Pty. Ltd. they advised that there were only two shares issued. These were £ 1 fully paid shares and were issued one to Mrs. Lorna Myra Cleary and one to C.B.J. Scutt in trust for Lorna Myra Cleary. There were only the one class of share issued and each share had equal rights with respect to voting, dividend entitlement and return of capital.

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 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.

They advised that the books of the company were held by Mr. C.B.J. Scutt of Elizabeth Street, Sydney and that so far as they were aware he still had the records.

The interview was then directed to Brian Hatch Timber Co. and at this point both Mr. and Mrs. Cleary denied any knowledge of any such company. They also denied any knowledge of Brian Hatch and Noela J. Hatch.

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ATC 4013

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.

The report is correct with the following correction

(1) We had no discussion with Berry Motors.

G.A. Cleary

L.M. Cleary J. Morgan 1.03 21.2.1968''

It should be added that no evidence was called on behalf of the Commissioner.

Walsh J. recognised, of course, that the question for him was not whether, upon the evidence before him, he was satisfied that the necessary continuity of ownership of the required proportion of shares had existed throughout the relevant periods but to decide whether it had been shown that, on the material that was before the Commissioner, the latter ``had failed to discharge properly his statutory function according to law''. His Honour was of opinion that there was nothing in the report of the interview with Mr. and Mrs. Cleary which I have earlier set out which could properly have caused the Commissioner's lack of satisfaction, and considered also that if the evidence given before him on the appeal had been before the Commissioner when he made his assessment, he could not properly have disallowed the deduction claimed. In these circumstances, his Honour took the view that in the absence of any evidence to the contrary, he should examine the Commissioner's decision ``on the supposition that he had acted on the actual facts'' - that is the facts proved before his Honour - ``or upon so much of them as had come to his knowledge''. In the result his Honour concluded that the Commissioner's lack of satisfaction could be satisfactorily explained only upon the assumption that some mistake of law had been made or some extraneous matter had been taken into account.

With all respect to his Honour, I am unable to agree with this conclusion. No doubt the Commissioner had before him material - perhaps much material - in addition to the taxpayer's income tax returns and the record of interview to which I have already referred. But it is impossible to say what that additional material may have disclosed or whether or not it covered the same ground as did the evidence before his Honour and in these circumstances I think, with respect, that his Honour erred in concluding that the Commissioner must have made some mistake of law or taken some extraneous matter into account.

Further, I am of opinion that some of the statements made by the Clearys in their interview with the taxation officer in February 1968 might reasonably have raised doubts in the Commissioner's mind whether at all relevant times after what they described as the ``sale'' of the company they, to use their phrase, ``retained any interest in the company''.

For these reasons I would allow the appeal against the assessment of primary tax (No.45 of 1971), set aside his Honour's order and in lieu thereof order that the appeal to him be dismissed with costs. I think it follows that the same order should be made in the second appeal from his Honour (No.46 of 1971). In the result the taxpayer's claim to be allowed a deduction of $67,506 fails, as does its objection to the assessment of Div.7 tax.

ORDER:

Appeals allowed with costs. Orders of Mr. Justice Walsh set aside and in lieu thereof order that the appeals against the assessments be dismissed with costs.