Patcorp Investments Limited (formerly Patrick Corporation Limited) & Ors. v. F.C. of T.

Judges:
McTiernan J
Gibbs J
Stephen J
Jacobs J

Court:
Full High Court

Judgment date: Judgment handed down 17 August 1976.

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McTiernan J.: These appeals were heard together and are appeals from the judgment and orders of Mason J. These appeals concern the Income Tax Returns of: -

• 1. Patcorp Investments Limited (formerly known as Patrick Corporation Limited and originally known as Mining Traders Limited) for the years ended 30 June 1968, 30 June 1969 and 30 June 1970.
• 2. Minsoul Pty. Limited for the year ended 30 June 1970.
• 3. Patrick Corporation Securities Limited (formerly known as Minwall Pty. Limited) for the year ended 30 June 1970.
• 4. M.T.A. Pty. Limited for the year ended 30 June 1970.
• 5. M.T.B. Pty. Limited for the year ended 30 June 1970.
• 6. M.T.D. Pty. Limited for the year ended 30 June 1970.

Patrick Corporation Securities Limited, M.T.A. Pty. Limited, M.T.B. Pty. Limited and M.T.D. Pty. Limited, at all relevant times, were wholly owned subsidiaries of Patcorp Investments Limited. The share capital of Minsoul Pty. Limited was, at all relevant times, owned as to one-half by Patcorp Investments Limited.

The taxpayers described themselves in their Income Tax Returns variously as ``investors'', ``investment company'', and ``investors and share traders''. Their main activity was, however, trading in stocks and shares.

The transactions in question are fully described in the judgment of Mason J. It is sufficient to say, for my present purpose, that the critical transactions involved the taxpayers acquiring shares in companies which had accumulated large amounts of profits available for distribution by way of dividends to shareholders. A dividend was then declared in favour of the taxpayers who subsequently sold the shares at a loss since the assets of the companies as they existed at the time of acquisition were depleted by the distribution of the valuable asset, the accumulated profits. This type of transaction is commonly known as a dividend stripping operation. The taxpayers in their taxation returns then sought to have the dividends rebated in accordance with sec. 46 of the Income Tax Assessment Act 1936, as amended, ``the Act'', and the loss on the re-sale of the shares deducted as a tax deduction in accordance with sec. 51 of the Act.

Section 46 of the Act, so far as is material, provides that a shareholder in a company is entitled to a rebate in its assessment to income tax of the amount obtained by applying the average rate of tax payable by the shareholder to the part of any dividends included in its taxable income. Section 51 provides: -

``(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.''

Section 46 rebate. It is clear from the evidence that at the date the dividends were paid to the taxpayers by the companies the taxpayers had acquired for the dividend stripping operations, the taxpayers were correctly entered on the registers of members of those companies in all cases except Austin Sales (Aust.) Pty. Ltd. Section 6(1) of the Act defines a ``shareholder'' to include a ``member''. The directors of the various companies (except in the case of Austin Sales (Aust.) Pty. Ltd.) had, at the time the dividends in question were paid, either approved or directed the registration of the transfer of the shares to the taxpayers. Moneys received by the taxpayers pursuant to the declaration of dividend by each of the companies acquired, other than Austin Sales (Aust.) Pty. Ltd., were thus ``dividends'' within the meaning of sec. 46 of the Act. The amounts paid to the taxpayers by Austin Sales (Aust.) Pty. Ltd. pursuant to the declaration of dividend by that company do not come within the relevant provisions of sec. 46 since in this case the taxpayers were beneficial holders of those shares and in such a situation the taxpayers cannot be described accurately as a ``shareholder'' or a ``member'' of the company. It must be concluded therefore that the conditions of sec. 46 were fulfilled and that the

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ATC 4228

taxpayers are entitled to a rebate on dividends declared and paid by the companies other than Austin Sales (Aust.) Pty. Ltd.

Section 51 deduction. Mason J. felt he was bound by the decision of this Court in
Investment and Merchant Finance Corporation Limited v. F.C. of T. 71 ATC 4140 ; (1971) 125 C.L.R. 249 and concluded that the amount of the losses sustained by the taxpayers in the dividend stripping transactions other than Austin Sales (Aust.) Pty. Ltd. were deductible. Two decisions of the House of Lords,
Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. (1963) A.C. 1 , and
Bishop (Inspector of Taxes) v. Finsbury Securities Ltd. (1966) 1 W.L.R. 1402 were referred to by Menzies J. in the I.M.F. case to support the conclusion of the majority. Since then, however, the House of Lords has decided
F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) (1972) A.C. 634 and
Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. (1972) A.C. 661 . In the F.A. & A.B. Ltd. case it was held by Lord Morris of Borth-y-Gest and Lord Guest that where a taxpayer buys shares to conduct a dividend stripping operation the share dealing transaction does not come within the area of trade of a dealer in shares. Viscount Dilhorne and Lord Donovan held that if a transaction viewed as a whole (including the manner of its implementation) was entered into with the purpose of securing a tax advantage then the transaction cannot be viewed as forming part of the trading activities of a dealer in stocks and shares. Lord Simon of Glaisdale expressed a similar opinion. In the Gurneville Securities Ltd. case Lord Morris of Borth-y-Gest Lord Guest , Viscount Dilhorne, Lord Donovan and Lord Simon of Glaisdale reiterated the opinions they had expressed in the F.A. & A.B. Ltd. case . In my opinion the views expressed by their Lordships in these two cases are to be preferred and should be followed here with the result that the outgoings on the purchase of the shares in the companies the taxpayers were endeavouring to dividend strip are not within sec. 51 nor are they proceeds of sale within sec. 25 of the Act. It cannot be said that the outgoings were incurred as an incident of the taxpayers' sharetrading business. They were not designed to achieve anything for those businesses except save the profits of the businesses from tax. In the circumstances the outgoings do not come within the second limb of sec. 51 and they also fall outside the first limb since the shares acquired were not trading stock and hence the cost of the shares would be non-deductible capital expenditure, not saved by sec. 51(2). The proceeds of sale are not assessable under sec. 25 since they are proceedings of a capital nature.

The assessments should be remitted to the Commissioner to be amended or adjusted in accordance with these reasons for judgment.