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Federal Commissioner of Taxation v. K. Porter & Co. Pty. Limited.

Judges:
Mahoney J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 25 March 1974.

Mahoney J.: In 1966 Mr. and Mrs. Porter (then the owners of the two issued shares in the taxpayer company) entered into an agreement with Mr. McMullen. At the time, the taxpayer company had accumulated tax losses which, within sec. 80 of the Income Tax Assessment Act, 1936, as amended, would have been available as allowable deductions from its assessable income for the year ended 30 June 1967.

The Commissioner of Taxation has claimed that such tax losses were not available as allowable deductions. His reasoning in this regard is, in substance, as follows -

  • (i) The losses are available as allowable deductions only if the Commissioner is satisfied that Mr. and Mrs. Porter were, in respect of the relevant income tax year, the beneficial owners of the relevant shares in the company: sec. 80A.
  • (ii) The Commissioner accepts that under the general law Mr. and Mrs. Porter were the beneficial owners of those shares.
  • (iii) However, the Commissioner claims, sec. 80B(5) applies to authorise him to treat Mr. and Mrs. Porter as not having been the beneficial owners of the relevant shares in respect of the particular tax year.
  • (iv) Therefore, the Commissioner is justified in not being satisfied of the matters referred to in sec. 80A.

The issue for determination by the Court is whether, in the circumstances of the case, sec. 80B(5) had application as the Commissioner of Taxation contends.

The basic as I find them to be are as follows -

  • On 1 July 1961, the business of Mr. and Mrs. Porter was acquired by the taxpayer company, Mr. and Mrs. Porter then each holding one of the two issued shares in the plaintiff company.
  • As at 30 June 1966, the plaintiff company had accumulated tax losses as follows - 
                                                 $
      Year ended 30 June 1964              4,560
      Year ended 30 June 1965              9,214
      Year ended 30 June 1966              2,220
                                         -------
                                         $15,994
                                         -------

    At that date the company was insolvent.

  • During early 1965, the accountant for Mr. and Mrs. Porter, Mr. Drever, negotiated with another accountant, Mr. McMullen, for the sale of the shares in the taxpayer company as a ``tax loss company''.
  • On 21 May 1966, Mr. McMullen by a letter of that date, Ex. V, ``confirmed'' that his ``client'' had ``agreed to purchase the structure (of the taxpayer company) for the sum of £275'' upon the conditions set forth in the letter.
  • In July 1966, twenty-one trade creditors of the taxpayer company and Mr. and Mrs. Porter agreed to assign the debts owed to them respectively by the taxpayer company to ``the nominee of a proposed purchaser of the structure of'' the company, and such assignments were made in a form of which Ex. W is a specimen.

    ATC 4096

  • On 16 July 1966, Mrs. Porter gave to Mr. Drever a proxy in respect of a general meeting of the taxpayer company to be held at Mr. Drever's office on 19 July 1966.
  • On 19 July 1966, a general meeting of the taxpayer company was held at which were present Mr. Porter, Mr. Drever (as Mrs. Porter's proxy) and Mr. McMullen. Mr. and Mrs. Porter resigned as directors and Mr. and Mrs. McMullen were appointed directors in their stead. No steps were taken to alter the existing shareholding of the company and therefore the two issued shares remained in the name of Mr. and Mrs. Porter.
  • Shortly afterwards, Mr. and Mrs. Porter gave to Mr. McMullen a general proxy ``to vote for me and on behalf of me at any ordinary or extraordinary general meeting of the company until otherwise advised''. (Copies of these proxies were tendered as Exs. X and Y).
  • On 20 July 1966 a cheque drawn by Law & Giddy Pty. Limited, a company beneficially owned by Mr. and Mrs. McMullen was received by Mr. Drever and the amount of the cheque, $787, when added to a deposit of $50 previously paid, represented payment at five cents in the dollar for the tax losses plus $100 for the assignment by Mr. and Mrs. Porter of their debts. On 29 July 1966 Mr. and Mrs. McMullen as directors resolved that the registered office of the taxpayer company be changed to their home.
  • On 30 June 1967 the taxpayer company had a net profit for the year of $3,605.12.
  • On 15 December 1967, a bank account was (for the first time since 19 July 1967) opened by the company.
  • On 19 December 1967 a general meeting of the taxpayer company was held at Mr. McMullen's home and was attended by Mrs. McMullen (as a director) and by Mr. McMullen (as proxy for Mr. and Mrs. Porter).
  • On 30 June 1968 the taxpayer company had a net profit for the year of $4,828.41.
  • On 15 November 1968 Mr. Drever and Mr. Porter were interviewed by officers of the Commissioner of Taxation.
  • On 17 December 1968, without a prior formal notice of meeting having been sent, a general meeting of the taxpayer company was held at Mr. Drever's office at which were present Mr. Porter (at the request of Mr. Drever), Mrs. Porter (by her proxy Mr. McMullen), Mr. Drever and Mr. Porter's accountant. Mr. and Mrs. McMullen were reappointed directors of the company at that meeting.
  • On 28 October 1969, again without prior notice of the meeting having been given a general meeting of the taxpayer company was held at Mr. Porter's home and there were present Mr. Porter, Mrs. Porter and Mr. and Mrs. McMullen. A copy of the minutes of that meeting is set out in the document (folio 35) comprising Ex. 2.

The facts in relation to the making of the assessments here in question and the appeals are as follows:

    (a) Assessment in respect of the year ended 30 June 1967

  • On 16 May 1968 the income tax return of the taxpayer company was lodged (Ex. B).
  • On 17 February 1969 a notice of assessment to primary tax was issued with an adjustment sheet indicating disallowance of the tax losses as allowable deductions (Exs. C and D).
  • There was also issued on that date an assessment to additional tax under Div. 7 of Pt. III (Ex. E).
  • On 31 March 1969, notices of objection were lodged in respect of those assessments (Exs. F and G).
  • On 5 May 1969, notice that such objections had been disallowed was issued (Exs. H and J).
  • On 2 June 1969, a request was made that the objections be referred to a taxation board of review (Ex. K).

    (b) Assessment in respect of the year ended 30 June 1968.

    ATC 4097

  • On 3 February 1969, the income tax return of the plaintiff company was lodged (Ex. L).
  • On 4 April 1969, a notice of assessment to primary tax was issued with an adjustment sheet indicating disallowance of the tax losses as allowable deductions (Exs. M and N).
  • On 14 May 1969, a notice of objection was lodged in respect of that assessment (Ex. O).
  • On 11 July 1969, notice that such objection was disallowed was issued (Ex. P).
  • On 23 April 1969, a request was made that the objection be referred to a taxation board of review (Ex. Q).

On 20, 21 and 22 October 1970, the three references were heard by the Taxation Board of Review No. 1.

On 27 July 1971, the objections to the three assessments were upheld.

On 26 August 1971, the Commissioner of Taxation appealed to the High Court of Australia under sec. 169 of the Income Tax Assessment Act against the upholding of those assessments.

On 22 June 1973, the appeals were referred to this Court consequent upon the Income Tax Assessment Act No. 3 of 1973.

The proceedings before this Court have been as follows.

The three appeals were remitted by the High Court of Australia to this Court. This Court was informed that the parties were agreed that the facts gave rise to a question of principle involving the proper interpretation of sec. 80B(5) which would be relevant in dealing with other cases and which they desired to have determined by the Full Court of the High Court of Australia. After some difficulty, the parties agreed upon and they placed before me the draft of a case which they sought to have stated by me to the High Court of Australia. That case, in its final form, is Ex. T.

Inherent in the facts as set forth in Ex. T were difficulties as to the admissibility of certain evidence there stated (see para. 1 of Ex. T) and the draft case involved the making of factual inferences or findings necessary for the determination of the questions upon which the opinion of the High Court of Australia was sought to be obtained. Submissions were made to me as to the extent to which the High Court of Australia could or should be asked to make the necessary inferences or findings of fact and reference was made to certain decisions of that Court dealing with the extent to which such inferences or findings could be made.

In the circumstances, I felt that the matters would be dealt with more appropriately if the appeal were heard before me, the necessary inferences and findings of fact made, and then such application be made to me in relation to the stating of a case as may then seem appropriate.

The facts as placed before me in evidence consist of the following -

  • (i) A copy of the stated case (Ex. T).
  • (ii) A number of exhibits tendered before me being substantially the documents which had been proposed to be annexed to the stated case in the form of Ex. T.
  • (iii) A copy of the decision of the Taxation Board of Review No. 1 given in respect of the three references (Ex. S).

The Commissioner of Taxation has conceded before me that Mr. and Mrs. Porter were at all relevant times the beneficial owners of the only issued shares in the taxpayer company and the matter has been argued before me upon the basis of this concession.

The questions which, as the matter has been conducted before me, are left for me to determine, may be stated as follows -

  • (a) Did Mr. or Mrs. Porter (before or during the year of income respectively in question) enter into ``a contract, agreement or arrangement'' of the kind referred to in sec. 80B(5)(b) and (c)?
  • (b) Did Mr. or Mrs. Porter (before or during the year of income respectively in question) grant a right, power or option

    ATC 4098

    of the kind referred to in sec. 80B(5)(b) and (c)?

I have had the benefit of the submission in writing of the arguments which the Commissioner of Taxation desires to advance in relation to these questions and substantially the argument has proceeded by reference to these submissions.

(a) Did Mr. and Mrs. Porter enter into a contract, agreement or arrangement within sec. 80B(5)(b) and (c)?

In the present case it is accepted by the parties that all of the shares in the taxpayer company were held by Mr. and Mrs. Porter and beneficially owned by them at all relevant times. There was, in fact, no issue of shares at any time to Mr. McMullen or his nominee. Therefore, if there was a contract, agreement or arrangement relevant for present purposes, it must have been one related to the use by Mr. and Mrs. Porter of the rights attaching to the shares owned by them.

The case for the Commissioner of Taxation was based upon the submission not that there was a contract or agreement as such but rather that there was an arrangement of the kind referred to in sec. 80B(5). The taxpayer company submitted that there was no such arrangement. The submissions which were made make it necessary to consider the meaning of the term ``arrangement'' as used in this section.

In the case as conducted before me and before the Board of Review, argument took place, first, as to the meaning of the term ``arrangement'' and, second, as to the evidence to which reference may properly be made in determining whether there is an arrangement and (if there is) what are its terms. As to the second matter, the taxpayer company submitted that certain of the facts set forth in the draft stated case (Ex. T) (though agreed to be facts) should not be taken into account by me in determining these questions. The Commissioner of Taxation submitted that those facts were relevant and made submissions generally as to the meaning of the term ``arrangement''.

In relation to the meaning of the term in sec. 260 of the Act, the High Court of Australia in
Bell v. F.C. of T. (1953) 87 C.L.R. 548 at p. 573 said -

``It must be remembered however that the section is concerned only with contracts, agreements or arrangements which have an effect in law and accordingly are capable of statutory avoidance. With this in mind it may be said that the word `arrangement' is the third in a series which as regards comprehensiveness is an ascending series, and that the word extends beyond contracts and agreements so as to embrace all kinds of concerted actions by which persons may arrange their affairs for a particular purpose or so as to produce a particular effect. The case of
Jacques v. F.C. of T. (1923-1924) 34 C.L.R. 328, itself and the later case of
Clarke v. F.C. of T. (1932) 48 C.L.R. 56 illustrate the application of the word. It is true that, as Isaacs, J. observed in the former of these cases at p. 359, the word does not include a conveyance or transfer of property as such; but as the cases cited show, under the section a conveyance or transfer of property may be void as against the Commissioner as being part of a wider course of action which constitutes an arrangement in the relevant sense of the term.''

In
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at pp. 7-8, it was said -

``Their Lordships are of opinion that the word `arrangement' is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan, but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else. It would be useless for the Commissioner to avoid the arrangement and leave the transactions still standing. The word `purpose' means not motive, but the effect which it is sought to achieve - the end in view. The word `effect' means the end accomplished

ATC 4099

or achieved. The set of words denotes concerted action to an end - the end of avoiding tax.''

In my opinion, the term ``arrangement'' as used in sec. 80B(5) includes ``an understanding'' or ``a plan'' which may not be enforceable in law and would include, inter alia, the legally effective acts which are done in the carrying out of that plan or arrangement.

It appears to have been argued before the Board of Review and reference was made before me to the argument that such an ``arrangement'' is not to be held to exist where it appears merely that each party understood what the requirements of the law were in relation to tax loss companies and what was required so that the losses should be available as allowable deductions, and that each party knew that in entering into the relevant transactions, the purpose of the one and the contemplation of the other was that such losses would be so available. It was put in the present case that, after the acceptance of the McMullen proposal contained in the letter of 21 May 1966 (Ex. V), it was ``a matter of indifference'' to Mr. and Mrs. Porter whether or not Mr. McMullen obtained the benefit of the losses and that to constitute an arrangement there must be ``a meeting of minds'' for a common purpose.

I agree with Mr. Priestley, Counsel for the taxpayer company, to this extent that if Mr. McMullen had proposed that he follow a course of action and if it were a matter of indifference to Mr. and Mrs. Porter whether he did so or not and that course of action did not include the doing or not doing of particular things by Mr. and Mrs. Porter, then, from these matters alone, no relevant arrangement could be inferred. In my opinion, a seller of a sixty per cent share interest in a loss company is not party to a relevant arrangement solely because he knows the purchaser proposes to order the affairs of the company so as to ensure that its position will be such that the losses will be available as deductions.

The problem of differentiating between a case of ``complete indifference'' of the kind referred to by Mr. Priestley and one in which, for the purposes of sec. 80B(5), there is a sufficient ``meetings of minds'', is one of considerable difficulty. As was pointed out by Mr. O'Neill in the statement of his reasons in this matter in the Board of Review, the term ``arrangement'' has in recent years been used with increasing frequency in legislation. He instanced sec. 260 and 262 of the present Act, and sec. 6(4) and (5), sec. 44(2D), sec. 77D(18) and sec. 160AC(15) added by amendments to the present Act. He referred to the Trade Practices Act, 1965, sec. 91, and to the Broadcasting and Television Act, 1952, Div. 3, Pt. IV and to sec. 91(1) of that Act. Reference may be made also to the Restrictive Trade Practices Act, 1956, of the United Kingdom: see generally Masterman and Solomon, ``Australian Trade Practices Law'', para. (102), and the cases there referred to.

The mere fact that the seller of the sixty per cent share interest knows of the course of conduct which the buyer would like the seller to follow, and why, is not of itself sufficient. The words ``entered into a contract, agreement or arrangement'' indicate that there is an element of commitment, one to the other, necessary to satisfy the statutory requirement.

That element of commitment may exist because the seller has expressly told the buyer that he will (even though he is in no way bound, legally or otherwise, so to do) follow the particular course of conduct, or has actually represented to him that he will do so: compare the observations of Diplock L.J. (as he then was) in
Re British Basic Slag Ltd's Application (1963) 1 W.L.R. 727 at p. 746.

However, the present case does not, in my opinion, fall within this category. There is no evidence from which I would infer that the result of the discussions between Mr. Drever and Mr. and Mrs. Porter (paras. 10-12 of Ex. T) were communicated in any relevant degree of detail to Mr. McMullen. I would not infer that there was an actual representation, as such, of the kind to which I have referred, by Mr. and Mrs. Porter to Mr. McMullen.

In the absence of such a statement or actual representation, the element of commitment to the course of conduct may be

ATC 4100

inferred or implied from the dealings between the parties. The question whether any such inference or implication should be drawn in the present case was, as I understand the argument, the main difference between the parties in the present case.

The facts must, in my opinion, go beyond knowledge by the seller of the desires or hopes of the buyer; to this extent as I have said I accept the submissions of Mr. Priestley and the views of the Board of Review. However, if a course of concerted action is outlined and the seller of the sixty per cent share interest would regard himself, as a reasonable and conscientious man, as under a duty to the buyer, be it legal, moral or social, to conduct himself in accordance with that course of conduct, then in my opinion there would be an arrangement within sec. 80B(5) if that course of conduct related to, affected or depended upon any of the matters referred to in para. (b)(i)-(iv) of the section. It may be that something less than this will constitute an arrangement under sec. 80B(5) but for purposes of the present case it is not necessary for me to determine this question.

The Commissioner of Taxation has further submitted that the meaning of the term ``arrangement'' in sec. 80B(5) is different from its meaning in sec. 260. In particular, he has submitted that the term is not to be read as subject to the qualification or limitation referred to in Newton's case, 98 C.L.R. 1 at pp. 9-10, which may conveniently be described as the ``business or family dealing qualification''.

It is true that the kind of arrangement referred to in sec. 260 is different from the kind of arrangement referred to in sec. 80B(5) in that sec. 260 applies only in relation to arrangements which have the ``purpose or effect'' specified in that section whereas sec. 80B(5) applies to arrangements which have relation to, affect or depend upon the matters referred to in para. (b) of that section. But the submission of the Commissioner of Taxation goes beyond this. The effect of his submissions is that a sec. 260 arrangement is ``concerted action to an end - the end of avoiding tax''; that whether the ``end'' of the arrangement is the avoidance of tax can be judged ``only by looking at the overt actions by which it is implemented'' - Newton's case at p. 8; and that so viewing those overt acts, the transaction will not have the relevant end if ``the transactions are capable of explanation by reference to ordinary business or family dealing without necessarily being labelled as a means to avoid tax'' at p. 8. In other words, the effect of this submission is that the ``ordinary business or family dealing qualification'' is relevant only to determine whether the end of the concerted action or arrangement is that referred to by sec. 260; and that as sec. 80B(5) is not concerned with the end of the arrangement but only with what it relates to, effects or depends upon, that qualification has no relevance in determining whether an arrangement falls within sec. 80B(5).

In my opinion, it is correct to say that an arrangement is not outside sec. 80B(5) merely because it is capable of explanation upon the basis of ordinary business or family dealing. Thus, if a person who retained a forty per cent interest in a loss company subsequently entered into an agreement, for value, to give an irrevocable proxy to the holder of the sixty per cent share interest, that transaction would be within the sub-section even though it appeared to be and indeed was in fact a genuine business transaction entered into at arms length and for value.

However, it does not follow that, as the Commissioner of Taxation submitted, there are no limitations upon the width of the meaning of ``arrangement'' as used in sec. 80B(5). The Commissioner submitted that the sub-section should be given its widest meaning and that the legislative intention disclosed by the words of the sub-section was that it should lie in the administrative discretion of the Commissioner to distinguish (as it was submitted) ``the genuine case'' from cases where the tax provisions are ``misused for the benefit of those who traffic in tax loss companies''.

I do not accept that that is the legislative intention to be inferred. As I have said, the sub-section does not apply where there is a mere sale of a sixty per cent share interest even though the parties understand the

ATC 4101

reason and purpose for the sale; but it does not follow that there may not be other qualifications to be applied, in the particular circumstances of the case, to what might be the widest meaning of the term ``arrangement''. In view of the findings which I have made, it is not necessary for me to attempt further to define the meaning of the term for present purposes.

It is now necessary for me to consider Mr. Priestley's submissions as to the relevance for the purpose of determining whether there was an arrangement and what were its terms, of the matters referred to in para. 1 of the draft stated case (Ex. T).

Mr. Priestley submitted in general that the matters were not to be referred to for present purposes because they were irrelevant to the questions to be determined in the present case. I shall deal shortly with each of the paragraphs to which objection is taken.

Mr. Priestley objected to the matters in paras. 7 and 11 upon the ground that the knowledge of the parties (or those acting for them) as to the requirements of the Act in respect of tax losses was irrelevant. In my opinion, the facts there referred to are relevant because they tend to show that the purpose (or one of the purposes) of the arrangement alleged was that ``of enabling the company to take into account'' its previous losses and this is a relevant matter under sec. 80B(5)(c).

However, the evidence is in my opinion relevant also to show that what the parties did and said constituted an arrangement in the sense to which I have referred and to show what the terms of that arrangement were. Where the parties have reduced a contract or agreement to a particular form (at least if that form is in writing) the law has adopted the policy of excluding extrinsic evidence as to the meaning of what the parties intended. However, even in such a case reference is permissible to ``the matrix of facts'' in which the transaction is set; evidence is admissible to show -

``..... what the circumstances were with reference to which the words were used and the object appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (
MacDonald v. Longbottom, 1 B. & R. 977) it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term''

:
Prenn v. Simmonds, (1971) 1 W.L.R. 1381 and p. 1384, per Lord Wilberforce.

His Lordship (at p. 1385A) said that -

``..... the commercial, or business, object of the transaction, objectively ascertained, may be a surrounding fact. Cardozo, J. thought so in the Utice Bank case. And if it can be shown that one interpretation completely frustrates that object, to the extent of rendering the contract futile, that may be a strong argument for an alternative interpretation, if that can reasonably be found.''

However, in my opinion, the rules applicable to the interpretation and construction of contracts: see
Life Insurance Co. of Australia Limited v. Phillips, 36 C.L.R. 60 at pp. 76-80; do not apply where the matter at issue is the existence and the form of an arrangement. Thus in my opinion, when it is established that Mr. Drever explained to Mr. Porter ``in the course of discussion of McMullen's offer'' ``that the proposed purchaser would have the right to subscribe for and have issued to him three shares so as to give him a sixty per cent interest in the company while Porter and Mrs. Porter would each continue to own their one share'' (para. 10 of Ex. T); and explained to them ``that the management and control of the respondent would pass to the proposed purchaser who only wanted sixty per cent of the share capital and that they should continue to have at least forty per cent of the shares even though they wanted to be rid completely of the company'', the fact that the parties or those representing them knew and intended to give effect to the income tax provisions in relation to loss companies so as to preserve the tax losses becomes relevant in determining whether such statements constitute part of an arrangement made between the parties.

ATC 4102

Mr. Priestley objected to paras. 9 and 19 of Ex. T on the ground that it was irrelevant whether the documents used by Mr. McMullen were those generally used by him in relation to the acquisition of tax loss companies. In my opinion this evidence is admissible as the basis for an inference that the purpose of the arrangement proposed was that of enabling the company to take advantage of its tax losses within sec. 80B(5)(c).

Paragraph 14 of Ex. T, (wherein it is stated that Mr. Drever agreed in conversation with Mr. McMullen to approach the trade creditors of the taxpayer company) is in my opinion admissible as showing that some form of arrangement (in the sense to which I have referred) was made between the parties and that they subsequently acted so as to carry out the arrangement. Thus, the obtaining of the assignments of debts from the creditors to Mr. McMullen was done pursuant to the arrangement made between them, being contemplated by the terms of the letter of 21 May 1966, Cl. 4 (Ex. V), and the arrangement was to that extent carried out by the co-operation of the parties. If it be found that an arrangement was made between the parties, then the only question to be determined is whether it contained as a term a matter falling within sec. 80B(5).

The fact that the only shareholders of Low and Giddy Pty. Limited were Mr. and Mrs. McMullen (para. 21 of Ex. T) is in my opinion admissible to show whether it was a term of the arrangement that the control (both legal and factual) of the plaintiff company should pass to Mr. McMullen: see para. 11 of Ex. T. Clause 4 of the letter Ex. V provided for the assignments to be made to the ``client'' of Mr. McMullen. The assignments were in fact made to Low and Giddy Pty. Limited. It is proper to infer that the purpose of the taking of the assignments was to enable the purchaser of the sixty per cent interest in the taxpayer company to exercise a practical control over it: cf.
X Co. Pty. Ltd. v. F.C. of T., 71 ATC 4152; 124 C.L.R. 343. This would be accomplished if the assignment of debt was made to a company controlled by Mr. McMullen.

Objection was taken to paras. 22, 26, 27, 30 and 35 of Ex. T. These paragraphs relate to acts done after the making of the arrangement alleged.

In relation to a contract which is made in or reduced to writing evidence of the subsequent acts of the parties is (subject to certain exceptions not here relevant) not admissible to aid in its construction:
L. Schuler A.G. v. Wickman Machine Tool Sales Ltd., (1973) 2 W.L.R. 683. In my opinion that principle is not applicable in the case of arrangements of the kind here in question. The fact that parties subsequently acted in a particular way may, in an appropriate case, be evidence from which, in all the circumstances, it can be inferred that they earlier made an arrangement of a particular kind. Where the arrangement is made partly by word or partly by writing, as in the present case, subsequent acts of the parties may in my opinion be probative of such an arrangement as is here in question. Thus, where it is suggested that it was part of the arrangement that Mr. McMullen should have the management and control of the taxpayer company, notwithstanding that all of the issued shares remained legally and beneficially in the ownership of Mr. and Mrs. Porter, the fact that Mr. McMullen treated the taxpayer company as completely controlled by him and did so to the extent that formalities which might not otherwise have been disregarded were disregarded in its affairs, is evidence of the existence of such an arrangement.

Mr. Priestley took objection to the relevance of para. 23 of Ex. T. This paragraph, stating that all transactions on behalf of Mr. and Mrs. Porter were conducted by Mr. Drever, is in my opinion evidence from which Mr. Drever's authority to act for Mr. and Mrs. Porter may be inferred or confirmed.

I am, therefore, of the opinion that all of the evidence to which objection is taken on behalf of the taxpayer company is admissible for present purposes.

I come now to consider whether there was an arrangement of the kind to which I have referred and, if there was, what were its terms.

ATC 4103

The sequence of the relevant events was, in my opinion, as follows: First, Mr. Drever and Mr. McMullen negotiated as to the possibility of Mr. McMullen purchasing ``the structure of'' the taxpayer company. During the discussions, Mr. McMullen told Mr. Drever matters that he, if he became a purchaser, would expect to occur. The details of that discussion are not established in the evidence, but having regard to the terms in paras. 10, 11 and 12 of Ex. T, it is proper to infer that the matters discussed extended beyond the particular matters specified in the offer made by Mr. McMullen in the letter of 21 May 1966 (Ex. V).

Second, Mr. McMullen made an offer in terms of the letter of 21 May 1966 (Ex. V). I am prepared to accept that, as far as any legally binding contract or agreement was made, it may have been restricted to the terms of this letter. However, the arrangement between the parties, in my opinion, extended beyond matters as specified in the letter.

Third, Mr. Drever explained to Mr. Porter or to Mr. Porter and Mrs. Porter, the matters referred to in para. 10, 11 and 12 of Ex. T.

Fourth, Mr. Drever, with the authority of Mr. and Mrs. Porter, advised Mr. McMullen that Mr. and Mrs. Porter agreed with the proposals.

Fifth, acts were done for the purpose of carrying out the arrangement between the parties. These acts included: the obtaining by Mr. Drever of assignment to Low and Giddy of the debts owing by the company (paras. 14 and 15 of Ex. T); the resignation of Mr. and Mrs. Porter as directors, and their voting for the appointment of Mr. and Mrs. McMullen as directors of the company (para. 16, Ex. T et seq.); and the granting by Mr. and Mrs. Porter of proxies (para. 18 of Ex. T).

If it be relevant to fix a point of time at which an arrangement, for purposes of sec. 80B(5) was made, that point of time was when Mr. Drever advised Mr. McMullen that Mr. and Mrs. Porter agreed to the proposal.

There was a singular lack of precision in the formulation of what was the proposal made and the proposal accepted. Thus, for example, in the letter of 21 May 1966 (Ex. V) there is no specification of whether the ``sufficient shares'' there referred to should be issued or transferred to Mr. Drever or his client, although in the discussions between Mr. McMullen and Mr. Drever (the content of which I infer was carried forward into the discussions between Mr. Drever and Mr. Porter (para. 10 of Ex. T)) the proposal appeared to have been that new shares should be issued.

It was argued for the Commissioner of Taxation that the arrangement which should be found to have been made, was simply ``that Mr. McMullen should take over ownership and control of the taxpayer company from Mr. and Mrs. Porter and operate it so that it would make a profit so that thereby advantage could be taken of the company's tax losses''.

In my opinion, the formulation suggested by the Commissioner of Taxation does not accurately state the arrangement made in the present case.

It is important, in relation to sec. 80B(5), as it has been held to be in relation to sec. 260: see
Hooker-Rex Pty. Ltd. v. Commissioner of Taxation 70 ATC 4033; 123 C.L.R. 71, that in order to determine whether the plan alleged is within the section, it should be clear what the plan consists of.

An arrangement within sec. 80B(5) may consist merely in the assent to the achievement of a particular objective and to the doing of whatever may happen to be necessary to achieve that objective; it may consist of assent to the doing of a series of specific things; or it may be a combination of these. I do not think that in the present case what was envisaged by the parties was merely that ownership and control of the taxpayer company should be ``taken over''. This is a too general statement of the proposed actions which would, if taken literally, include the acquisition by Mr. McMullen of all the shares, and I do not think that what was envisaged can be so stated. The arrangement made was more specific.

ATC 4104

In my opinion, having regard in particular to the terms of the letter of 21 May 1966 (Ex. V) and to paras. 10, 11 and 12 of Ex. T, the arrangement comprehended the following -

  • (a)that there would be an assignment of debts by the taxpayer company's creditors to Mr. McMullen or his nominees. This appears in para. 4 of Ex. B and para. 10 of Ex. T;
  • (b) that Mr. and Mrs. Porter would resign as directors of the taxpayer company;
  • (c) That they would, if requested by Mr. McMullen so to do, use their voting power as shareholders to cause him and his nominee to be elected as directors in their place;
  • (d) that, when requested so to do, Mr. and Mrs. Porter would either cause to be issued to Mr. McMullen or his nominee, sufficient shares to give him a 60% share interest in the taxpayer company or would not, as shareholders, take any objection to the issue of such a share interest to him, when requested.

As there were only two issued shares, the contemplation was, in my opinion, that Mr. McMullen would obtain his 60% share interest by the issue to him of additional shares, rather than by the assignment to him of shares: see para. 2 of Ex. V and para. 10 of Ex. T.

The power to issue new shares was vested in the directors and not in the company: Article 7 of the Articles of Association of the taxpayer company, Ex. Q. It is not necessary for me to express any concluded view upon the question whether or to what extent the shareholders in general meetings could control the powers of the directors in this regard, but, holding the only two issued shares, Mr. and Mrs. Porter could effectively have, for example, altered the Articles of Association to prevent the issue of such shares to Mr. McMullen. It would, therefore, in my opinion, have been contemplated by the parties that, whilst Mr. McMullen held no shares in the company and until he attained the 60% interest contemplated, Mr. and Mrs. Porter would not exercise the voting rights appurtenant to their shares to prevent the directors issuing such shares to him.

  • (e) that during the time when they retained the voting control of the company Mr. and Mrs. Porter would not so exercise that control as to prevent Mr. McMullen and his nominees having the management and control as directors of the taxpayer company:para. 11 of Ex. T.

In my opinion, it was part of the arrangement made that Mr. McMullen and those he represented should have ``the management and control'' of the taxpayer company. I infer that Mr. and Mrs. Porter understood that this management and control would continue thereafter and that this was part of the course of action or inaction which the parties accepted they would follow. During the period when they remained the only shareholders in the company, this position could be maintained only if, first, they each year exercised their voting power so as to re-elect, on rotation of the directors: see Article 73 of Table A of the Companies Act 1936 (as amended) incorporated into the Articles of Association of the taxpayer company; the retiring director (or a person selected by Mr. McMullen to replace him); and, second, that they did not exercise their voting power so as effectively to remove Mr. McMullen's directors from office.

  • (f) that Mr. and Mrs. Porter would not, until the tax losses had been availed of as deductions by the taxpayer company, so deal with their shares that they would cease to hold them beneficially.

The relevant facts in relation to this aspect of the matter are set forth in paras. 10, 11 and 12 of Ex. T. These paragraphs set out what, after receipt of the letter of 21 May 1966, Ex. V, Mr. Drever explained to Mr. and Mrs. Porter by way of discussion of the offer so made. It is there said that Mr. Drever explained, inter alia, ``that the proposed purchaser would have the right to subscribe for and have issued to him 3 shares so as to give him a 60% interest in the company while Porter and Mrs. Porter would each continue to own their one share'': para. 10; ``that the management and control of the respondent would pass to the proposed purchaser who only wanted 60% of the share capital and that they should

ATC 4105

continue to have at least 40% of the shares even though they wanted to be rid completely of the company'': para. 11; and ``that for McMullen to obtain the benefit of the tax losses it was necessary that the Porters should continue to hold at least 40% of the issued shares of the respondent''.

From this evidence, and in the light of the letter of 21 May 1966, Ex. V, should it be inferred that it was a term of the arrangement that Mr. and Mrs. Porter should not so dispose of their shares as to reduce their share of interest in the taxpayer company below a 40% beneficial share interest?

In view of the findings which I shall make as to the effect of the arrangement generally, it is not essential for me to deal with this aspect in detail. However, the matter has been discussed in argument and I shall deal with it.

In my opinion, it is probable that Mr. and Mrs. Porter felt that they were under a moral or social duty to retain a 40% beneficial share interest. The evidence upon the matter is not explicit, and the matter is essentially one of inference. If there had been simply a sale to Mr. McMullen of a 60% share interest with nothing more other than the knowledge by both parties of the significance of the reduction subsequently of the 40% share interest below that level, I would not have drawn such an inference. However, in the present case, the position was different.

I am satisfied that, in the negotiations that were had between Mr. Drever and Mr. McMullen, they outlined between them a course of conduct to be followed which was not merely that which was specified in the letter of 21 May 1966, Ex. V. What Mr. Drever told Mr. and Mrs. Porter (paras. 10, 11 and 12 of Ex. T) not merely went beyond the offer contained in that letter; it differed from it. For example, the letter (para. 2) stipulated that ``sufficient shares will be issued or transferred'' to give a sixty per cent share interest; in the discussion of the offer, Mr. Drever said that ``the proposed purchaser would have the right to subscribe for and have issued to him three shares'' (para. 10 of Ex. T). The decision to rely upon (as Mr. McMullen did) the right to have the three shares issued to him rather than have shares immediately issued or transferred must, in my opinion, have been made and conveyed to Mr. Drever during the negotiations between him and Mr. McMullen.

However, whether, in the outlining of that course of conduct between them, one of the matters referred to was the retention by Mr. and Mrs. Porter of their shares, is more difficult to decide. I am influenced to infer that it was, by two things. First, the retention of a forty per cent share interest by Mr. and Mrs. Porter was referred to by Mr. Drever at least twice, in the conversation with Mrs. Porter (para. 10 of Ex. T) and in the conversation with ``the Porters'' (paras. 11 and 12 of Ex. T), and was referred to in terms which placed some emphasis upon it; ``would continue to own...''; para. 10; ``they should continue to have at least 40% of the shares even though they wanted to be rid completely of the company'': para. 11; and ``it was necessary that the Porters should continue to hold...'': para. 12. The fact that it was referred to in these conversations in this way suggests that it was a matter discussed specifically between Mr. Drever and Mr. McMullen.

Second, the nature of the relationship between Mr. and Mrs. Porter and Mr. McMullen suggests that it is likely some arrangement was made as to the future retention by them of their shares. The transaction which took place in May-June 1966 left Mr. and Mrs. Porter, not in the position of minority shareholders, but of sole shareholders in the taxpayer company. The ownership of their shares was therefore a matter touching not merely the availability of the tax losses as deductions but also the control by Mr. McMullen of the company.

In these circumstances, it is, in my opinion, likely that, when arranging with Mr. Drever that the transaction would be carried out by leaving all the shares in the beneficial ownership of Mr. and Mrs. Porter, Mr. McMullen would have referred to what he would expect them to do in relation to the shares. What was involved was not merely a passive retention of a forty per cent share interest but, inter alia, positive acts to be

ATC 4106

done in relation to the then one hundred per cent share interest, by way of use of voting power and other matters; and these matters were, as I have inferred, discussed, and such matters were, it is admitted, given effect to by what was later done. It does not necessarily follow that, because he referred to the shares in this regard, Mr. McMullen also referred to their retention by Mr. and Mrs. Porter. But retention of them was vital to the tax loss arrangements, and if the two accountants discussed what Mr. and Mrs. Porter were expected to do in relation to the shares, the probability is that their discussion of what was expected extended to the retention of the shares.

In fact, Mr. and Mrs. Porter did retain their shares, ``even though they wanted to be rid completely of their company'' (para. 11 of Ex. T).

On balance, therefore, I infer that it was a term of the arrangement that the shares should be retained, in the manner to which I have referred.

I come now to consider whether an arrangement with such terms is an arrangement within sec. 80B(5).

I am satisfied that the requirements of paras. (a) and (b) of sec. 80B(5) are satisfied because Paragraph (a) is satisfied because Mr. and Mrs. Porter beneficially retained their shares. If, as I have found, the arrangement contained a term that Mr. and Mrs. Porter would use the voting power attached to their shares to put in and maintain the McMullen interests in control of the Board of Directors, then in my opinion, the arrangement ``related to, affected or depended for its operation on'' ``rights carried by'' the relevant shares, viz., the shares held by Mr. and Mrs. Porter during the year of income, and the arrangement was within sec. 80B(5)(b)(ii).

In addition, insofar as it was a term of the arrangement that Mr. and Mrs. Porter should not so deal with their shares as to reduce the number held below a 40% share interest in the taxpayer company, that term ``affected'' their right to sell or dispose of such shares and the arrangement was therefore one within sec. 80B(5)(b)(ii): see
Franklin's Selfserve Pty. Limited v. F.C. of T. 70 ATC 4079 at p. 4095; 125 C.L.R. 52 at p. 80.

Paragraph (c) of sec. 80B(5) requires that the arrangement be entered into for the purpose (or for purposes that include the purpose) ``of enabling the company to take into account... a loss that the company incurred'' in a prior year.

The question to be determined in applying para. (c) to the facts of the particular case is: what was the ``purpose for'' which the arrangement was made or the right granted?

The reasons why in practice an arrangement or the grant of a right of the kind referred to in para. (b) would be undertaken would in the main be:

  • (i) to ensure that the requirements of sec. 80A are complied with (e.g. by a covenant that the seller will not dispose of his 40% beneficial share interest before the losses are fully used);
  • (ii)to achieve the result that although in form the seller will have a 40% beneficial share interest at all relevant times, in substance the seller will not enjoy the rights as to voting and as to income and asset entitlement which normally such a share interest would confer upon its owner; and
  • (iii) to enable the buyer of the 60% beneficial share interest to cause the company to derive income which it would otherwise not have derived, against which to set off its tax losses.

Considering the meanings which would normally be given to the words of para. (c) (``... for the purpose... of enabling the company to take into account... a loss that the company had incurred...'') they could comprehend matters within (i) or (iii) above. However, it is more difficult to see how such words could comprehend matters within (ii). The purpose for which an arrangement or grant of a right, falling within (ii) would be effected would be, not to enable the company to take into account its tax losses but to prevent the seller enjoying the full benefits of his 40% beneficial share interest. Matters falling within (ii) are effected, (not for the purpose of enabling the company to take

ATC 4107

into account its tax losses) but upon the assumption that the company will have already achieved that result.

But on the face of it, to give such a meaning to para. (c) would appear to produce a curious result. The plan of the legislation is to prevent tax losses being taken into account unless the seller retains the kind of 40% beneficial share interest specified in sec. 80A and procedures within (ii) would be procedures whose purpose would be to defeat the effect of sec. 80A. Yet, if para. (c) be given its normal meaning it might operate to exclude from sec. 80B those sec. 80A-defeating procedures.

The Commissioner of Taxation submitted in effect the difficulty could be avoided by so construing sec. 80B(5) that any arrangement or grant of a right which falls within para. (b) operates to give rise to the Commissioner's discretionary power of disallowance under the sub-section; and that it should be left to the Commissioner, in the exercise of his discretion, to distinguish between those arrangements or grant of rights which were directed to tax avoidance and those which were ``genuine''.

However, that construction of sec. 80B(5) in my opinion ignores the problem posed by para. (c). Paragraph (c) limits the kind of para. (b) matters to which the Commissioner's powers apply and it is only after para. (c) has been construed that it is possible to determine whether the particular transaction is one in respect of which the Commissioner's power is exercisable.

I shall therefore consider whether either of the arrangements which I have held to have been made ``for the purpose'' specified in para. (c).

As to the arrangement that Mr. and Mrs. Porter would use the voting power attached to their shares to put into and maintain the McMullen interests in control of the board of directors: the purpose for which that arrangement was made by the McMullen interests was in my opinion to ensure that they would have the practical control of the operations of the company. The purpose of having that control was to enable the variation of shareholding to be achieved, as and when desired by those interests and, in addition, to enable the company to enter into transactions which would result in its earning assessable income, against which the tax losses would be set off. If it be necessary to find the purpose for which the arrangement was made by Mr. and Mrs. Porter, I infer that it was that ``the management and control of (the company) would pass to'' the McMullen interests: para. 11 of Ex. T; and I infer that having been told that ``the proposed purchaser's interest in taking over the structure of (the company) was to obtain the benefit of its tax losses'' and ``to that end'' such management and control was to pass to the purchaser: para. 11 of Ex. T; the purpose of Mr. and Mrs. Porter in entering into the arrangement included the purpose of enabling the purchaser to do such things as would be seen as necessary to enable the company to derive income against which the tax losses would be set off.

To give control of a tax loss company in order to permit the buyer to achieve such a result is, in my opinion, to act ``for the purpose'' specified in para. (c). The words ``enabling the company to take into account'' may at first sight appear awkward in this context. ``Take into account'' is used, as it is used in sec. 80(2)(c) as meaning ``deduct from assessable income'': cf. sec. 80(2)(a) and (b) and the definition of ``taxable income'' in sec. 7. The word ``enabling'' at first sight appears inapt when what is achieved by the arrangement or grant of a right is the derivation of income, but where the context is one in which it is contemplated that there will or may be an element of manipulation or artificiality in the circumstances in which the income will be derived by the company, the word, in the sense of ``making it possible'' is less inappropriate.

This view of para. (c) finds support in the judgment of Menzies J. in
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Limited 72 ATC 4001 at p. 4009; 46 A.L.J.R. 111 at p. 116G. The Court there was considering the effect of the grant of proxies to vote at meetings of the company. Menzies J. said -

``It has next to be considered how the condition expressed in sec. 80B(5)(c) may

ATC 4108

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).''

It was argued for the company in the present case that these observations were dicta only and that I should not follow them. The words of para. (c) are not easy to construe but their ordinary meaning is, as I have said, wide enough to comprehend such a meaning as Menzies J. referred to. In addition (if it be relevant) in relation to the construction of para. (c), it may be noted that the legislature has given some indication that in the context of the ``continuing business'' test in sec. 80B, processes whereby income is derived as the result of transactions of a kind not previously entered into by a tax loss company are of such a nature as to warrant disallowance of the losses: sec. 80B(2). It may be that it can be inferred, in relation to sec. 80B(5) that transactions whereby income is diverted to a tax loss company are within the mischief to be dealt with by that section.

However this be, the words of para. (c) are wide enough to comprehend the kind of ``purpose'' to which I have referred and I would respectfully be of the view that his Honour's observations correctly interpret the paragraph; but in any event such observations represent the considered view of a member of the High Court of Australia, concurred in by the Chief Justice (at p. 4003) and as such should be followed by me.

I am, therefore, of opinion that the arrangement as to the use of voting power was such as to bring into operation the Commissioner's powers under sec. 80B(5).

As to the arrangement that Mr. and Mrs. Porter would not so deal with their shares as to reduce the interest held by them below a 40% beneficial share interest in the company: the purpose of this arrangement was clearly to ensure that sec. 80A would be complied with and that, therefore, the entitlement to deduction of tax losses, prima facie, given by sec. 80A would not be taken away by sec. 80A. Section 80A provides that ``... a loss... shall not be taken into account... unless'' that section's provisions are complied with. An arrangement directed to ensuring that sec. 80A would be complied with is an arrangement having the purpose of ``enabling the company to take into account'' its tax losses in the sense of making it possible to deduct the losses from assessable income. It is made possible for a company to achieve the process of deducting losses from assessable income as much by providing it

ATC 4109

with assessable income as by effecting compliance with a condition precedent to such deduction. Prima facie, therefore, an arrangement to secure compliance with sec. 80A is an arrangement having a purpose within the literal meaning of para. (c).

Such an interpretation of para. (c) finds support in the decision of Menzies J. in Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079; 125 C.L.R. 52. In that case, the original arrangement made between the parties had contained a covenant by the sellers that ``they shall not transfer...'' any of the shares in the relevant company held by them (at p. 4095). Subsequently the parties had ``rescinded'' that covenant and had ``released and discharged each other from all obligations and liabilities therein contained''. The question before the Court was whether those facts gave rise to the Commissioner's powers under sec. 80B(5). His Honour held that the facts fell within para. (b) of the sub-section.

His Honour then said at p. 4096 -

``For the taxpayer it was argued that sec. 80B(5) cannot be given its literal interpretation and ought to be confined to agreements directed towards enabling a company to utilize its losses having the effect of restricting or limiting the real or effective beneficial ownership of shares, i.e. having an adverse effect upon beneficial rights. It was also argued that the provision only applied to an agreement which had a continuing effect upon the matters referred to in sec. 80B(5)(b), (i) to (iv). Accordingly, it was sought to draw the conclusion that the agreement of 30 June 1966 was not within its terms. I agree, of course, that the provision applies only when it is made with the purpose of obtaining as a tax deduction the losses of a previous year. This, it seems to me, was the purpose of the making of the agreement of 30 June 1966 because the existence of cl. 5 of the original agreement would have been a bar to the deduction of losses against the income of the year 1967. I have found no reason for inferring any more extensive purpose than that for which the subsection itself provides. Whether or not the provision can be given its full literal meaning in all circumstances I do not attempt to decide, but I cannot, in the face of the language used, confine its operations to agreements imposing limitations of the sort described in sec. 80B(5)(b), (i) to (iv). All that is necessary is that the agreement should relate to, or affect, these matters. Moreover, if continuity in the operation of an agreement be a feature essential to the operation of sec. 80B(5)(c) - as was contended on behalf of the taxpayer - it is clear enough that the rescission of cl. 5 of the original agreement meant that, for the future, it did not operate.

Accordingly, I uphold the Commissioner's contentions with regard to sec. 80B(5) and consider that, apart from all else, the Commissioner was entitled thereunder to treat the shares in question as not having been beneficially owned by the shareholders in the relevant sense in the tax years 1966 and 1967; i.e. the two ordinary shares held by R.M.H. and the two preference shares held by Major 8 as not having been so held in the 1967 year of income, and the two preference shares held by Major 8 as not having been beneficially held in the 1966 year of income.''

His Honour therefore held that upon the facts referred to the Commissioner's powers arose under sec. 80B(5). The ambit of para. (c) was directly in issue in that case. The submission was made that para. (c) did not extend to such facts because it should on its proper construction be confined to arrangements for restricting or limiting the real or effective beneficial ownership of the retained 40% beneficial share interest. His Honour, however, rejected that construction of para. (c) and gave the paragraph a construction wide enough to include the facts then before him.

It was argued in the present case that, in the Brian Hatch case (supra) in the passage to which I have referred, his Honour said:

``However, an arrangement to secure conformity with the requirements of sec. 80A(1) does not itself enable a company

ATC 4110

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;''

and that his Honour was therefore indicating a view contrary to that adopted in the Franklin's case.

In construing para. (c) a question may, as I have suggested, arise as to why an arrangement directed to ensuring that sec. 80A will be or continue to be complied with should be proscribed or, more accurately, give rise to the Commissioner's powers under sec. 80B(5). It may be that having had some experience with the ingenuities involved in tax avoidance, the legislature was not confident that it could in terms block up all loopholes and that, therefore, it should cast a wider net than might otherwise be thought necessary: see the observations of Lord Simon of Glaisdale in
Fleming v. Associated Newspapers Limited, (1973) A.C. 628 at p. 646E; and therefore sought to achieve the result that, in the case of a tax loss company, any arrangement additional to the mere sale of shares should give rise to a discretionary power to disallow the losses.

However this be, again, such an arrangement is within the literal words of the subsection and prima facie is within the decision in the Franklin's case. If the dicta in the Brian Hatch case are to be interpreted as expressing a different view, the proper course to be followed by me is to follow the decision in the Franklin's case and to leave it to the High Court of Australia if it feels it proper so to do to deal authoritatively with the construction of para. (c) upon appeal.

I therefore hold that this arrangement also gives rise to the Commissioner's powers under sec. 80B(5).

One other aspect of the construction of para. (c) should be referred to. The paragraph refers to the purpose for which the ``arrangement'' was entered into. The arrangement which upon my findings, was entered into was one which contained several terms of which the two terms to which I have referred were each only one. In the literal sense the purpose of enabling the company to take into account its tax losses was the purpose of the particular term or terms, not of the arrangement as a whole. However, in my opinion, the purpose of a particular term may properly be described as one of the purpose of the arrangement as a whole and I do not think that fact that a purpose falling within para. (c) is the purpose only of one or two of the terms of the arrangement prevents it from being that purpose any less within para. (c).

In my opinion, therefore, Mr. and Mrs. Porter did at the relevant time enter into an arrangement of the kind referred to in sec. 80B(5).

(b) Did Mr. or Mrs. Porter, at the relevant time, grant a right or power of the kind referred to in sec. 80B(5)(b) and (c)?

The Commissioner, in this regard, relied upon the grant of proxies by Mr. and Mrs. Porter. Proxies were granted on two occasions: first, by Mrs. Porter prior to the meeting of 19 July 1966, at which Mr. and Mrs. McMullen were first appointed directors of the company: para. 16 of Ex. T; and, second, shortly after that meeting when both Mr. and Mrs. Porter gave general proxies to Mr. McMullen: paras. 18-19 of Ex. T.

The first proxy granted, even if it enabled the Commissioner to treat Mrs. Porter's shares as not having been beneficially owned at the relevant time, would not, standing alone, support the present assessment, because the necessary 40% share interest as required by sec. 80A would have been maintained by Mr. Porter's shares.

However, if the second granting of proxies, by Mr. and Mrs. Porter, falls within sec. 80B(5), then the assessment may be capable of being supported.

In F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd., 72 ATC 4001 at p. 4008, 46 A.L.J.R. 111 at p. 116, Menzies J., with whom Barwick C.J. agreed in this regard, held sec. 80B(5) to be satisfied, in circumstances which as far as is relevant, are analogous, where proxies were granted.

Menzies J. (at p. 4009) said that ``by virtue of a proxy given to him a person has,

ATC 4111

therefore, powers in relation to the exercise of rights carried by these 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)(c)''.

Mr. Priestley submitted that the giving of a proxy amounted only to the grant of an authority and not ``the grant of a right''. Whether this argument be correct, and I express no opinion upon it, in my opinion, the giving of the proxies constituted the granting of a ``power'' which ``related to affected or depended for its operation upon'' ``rights carried by'' the shares or ``the exercise of any such rights'', viz., the right to cast votes. Even if the finding of Menzies J. in this regard be, as Mr. Priestley submitted, merely obiter, it is the considered view of a member of the High Court of Australia and as such, should be followed by me.

In the same case, Menzies J. (at p. 4009) held also that the granting of the proxies there in question satisfied sec. 80B(5)(c). Paragraph (c) requires that the purpose for which the right or power was granted included the purpose ``of enabling the company to take into account...'' its tax losses. In one sense, the purpose of the grant of the proxy to Mr. McMullen was to enable Mr. McMullen to continue in control of the company's operations and, therefore, not directly the purpose specified by the paragraph.

His Honour however, held in the passage to which I have previously referred, that the way in which a company usually ``takes into account'' its tax losses ``is by making profits from which'' they may be deducted. He accepted that the proxies there in question ``were obtained to enable the company to become one of the Brian Hatch group of companies and to carry on business profitably''. I infer from his Honour's judgment that if it be found that the purpose of the proxies was to give control to the ``tax loss purchaser'' for the purpose of enabling him to cause the company to carry on business in such a way as to make profits from which the losses could be deducted, it may be found that the proxies were granted for a purpose within para. (c).

In the present case, Mr. McMullen caused the company to make profits in a way which, though perhaps not peculiar to himself, was peculiar in the sense that it involved the acquisition and resale of the profit of shares in other loss companies and the acquisition by the sale of debts of such companies: para. 24 of Ex. T. In my opinion, upon the principles established by Menzies J., the requirements of para. (c) were satisfied in the present case.

I have dealt with these appeals by reference to the submissions which have been made to me and I have made such findings or inferences of fact as appear necessary to enable those submissions to be dealt with.

CCH Note: After discussions between the parties, Mahoney J., by consent, ordered that the appeals be allowed, that the assessments be confirmed, and that the respondent taxpayer pay the costs of the appellant Commissioner.


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