Deputy Federal Commissioner of Taxation v. Truhold Benefit Pty. Ltd. (No. 3).

Judges:
Gibbs CJ
Mason J
Wilson J
Deane J
Dawson J
Brennan J

Court:
Full High Court

Judgment date: Judgment handed down 11 June 1985.

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Gibbs C.J., Mason, Wilson, Deane and Dawson JJ.

This matter was removed by the defendant company into this Court from the Supreme Court of Queensland under sec. 40(1) of the Judiciary Act 1903 (Cth). It concerns the validity of sec. 6(2) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) (``the Act''), that question being raised by the defendant upon demurrer.

The Act provides for the assessment and collection of taxes intended to recoup the revenue for company tax which was lost as a result of the adoption of schemes which left companies without assets to pay the taxes for which they were liable. The general nature of the legislation is described in
MacCormick v. F.C. of T. 84 ATC 4230; (1984) 58 A.L.J.R. 268; (1984) 52 A.L.R. 53. In that case it was held that the Act was a law with respect to taxation within the meaning of sec. 51(ii) of the Constitution.

Because of the decision in MacCormick v. F.C. of T., the mode of taxation adopted by the Act is not attacked in this case, but sec. 6(2) is said to lie outside the power to make laws with respect to taxation and to be invalid as a consequence.

Under the relevant legislation, which includes both the Act, which is an assessment Act, and two taxing Acts, recoupment tax is imposed when, pursuant to a scheme as defined, shares in a ``target'' company have been sold with the result that the company is unable to pay overdue company tax. The type of recoupment tax which is relevant for present purposes is vendors recoupment tax. This tax is imposed upon a vendors taxable amount, which

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ATC 4300

may comprise either a primary taxable amount or a secondary taxable amount, or both.

Speaking in somewhat simplified and broad terms, a primary taxable amount exists in relation to the vendors of the shares in a target company and the total is the whole of the overdue company tax. A secondary taxable amount comes into existence, again speaking broadly, where, in the first instance, a vendor of shares in a target company was itself a company (called the relevant company) and has ceased to exist, or where the shares in the relevant company or its holding company have been sold and the Commissioner is of the opinion that it would be unreasonable that it should be liable to pay recoupment tax, or where the Commissioner is of the opinion that the relevant company is unlikely to pay the recoupment tax. In these circumstances, a secondary taxable amount is to be taken to exist in relation to a person entitled, at the relevant time (which is specified), to participate in a capital distribution of the relevant company, the amount being proportionate to that entitlement. Where, as a result of this tracing process, a secondary taxable amount exists in relation to another company, the process may be continued until the conditions laid down for the application of the relevant provisions are no longer satisfied. In the case of a relevant company in which shares have been sold, the process will be halted if the Commissioner does not form the opinion that it would be unreasonable that the company should be liable to pay recoupment tax.

It is sec. 6 of the Act which deals with secondary taxable amounts and it is subsec. (2) of that section which deals with the sale of shares in relevant companies. The section applies to trust estates as well as companies but it is unnecessary in this case to deal with the former separately. Subsection (2) provides, so far as is relevant, that:

``Where -

• (a) at any time (in this sub-section referred to as the `relevant time') a vendors taxable amount exists in relation to a company (in this sub-section referred to as the `relevant company')... in relation to a sale of shares or of an interest in shares;
• (b) after the time of sale of the shares or interest referred to in paragraph (a) and before the relevant time -
  • (i) if the vendors taxable amount exists in relation to the relevant company -
    • (A) Some or all of the shares in the relevant company were sold; or
    • (B) some or all of the shares in another company that, immediately before the time of sale of the shares or interest referred to in paragraph (a), was a holding company of the relevant company, were sold;... and
• (c) the Commissioner is of the opinion that, by reason of a circumstance mentioned in paragraph (b), it would be unreasonable that the relevant company... be liable to pay recoupment tax on the vendors taxable amount...,''

a secondary taxable amount shall be taken to exist in relation to each person entitled to participate as a shareholder in a capital distribution of the relevant company at the relevant time being a proportion of the vendors taxable amount calculated on the basis of that person's entitlement upon the notional capital distribution. Pursuant to later subsections which extend the operation of subsec. (2), various persons are deemed to be persons who would have been entitled to participate in such a distribution of capital as shareholders in the company, including a shareholder who in fact received a distribution of capital from a company after the time of sale of shares in the target company.

The submission made on behalf of the defendant company is that liability to pay recoupment tax under sec. 6(2) of the Act and the relevant section of the taxing Act (the Taxation (Unpaid Company Tax - Vendors) Act 1982 (Cth)), is imposed in an arbitrary manner and, as a consequence, the subsection is not a law with respect to taxation. The primary basis upon which the submission is made is that liability arises under the subsection only where the Commissioner forms an opinion that it would be unreasonable that a relevant company, otherwise liable, should be liable to pay recoupment tax and that in forming that

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ATC 4301

opinion the Commissioner is entitled to look only to the circumstances in para. (b), that is to say, the sale of shares in the company or its holding company.

A further basis put forward for the submission that the relevant tax is arbitrary is that the persons upon whom it is imposed need have no connection, direct or indirect, actual or derivative, with the transaction in which the target company was stripped and need not even have been in existence at that time. In this latter respect, reliance is placed upon sec. 6(13) of the Act. That subsection defines the relevant distribution time in relation to a vendors taxable amount that exists in relation to a company for the purposes of a notional capital distribution. If the company existed at the time of sale of the shares in the target company which, in the first instance or by tracing, gave rise to the vendors taxable amount, then the relevant distribution time is the time of sale. If, however, the company did not exist at that time, the relevant distribution time is the time when the company was created. If the Commissioner is of the opinion that either time is inappropriate, the relevant distribution time is such later time as the Commissioner determines.

In MacCormick v. F.C. of T. it was held that the recoupment tax, for which the Act provides, answers the usual description of a tax. Amongst the characteristics which were said by the majority to bring it within that description was the fact that the tax is not arbitrary. See ATC pp. 4235-4236; A.L.J.R. p. 273; A.L.R. p. 63. This was, as the relevant passage shows, a reference to the fact that liability can only be imposed by reference to ascertainable criteria with a sufficiently general application and that the tax cannot lawfully be imposed as a result of some administrative decision based upon individual preference unrelated to any test laid down by the legislation. To say that a tax may not be arbitrary in that sense does not, of course, preclude the pejorative description of a tax as arbitrary in the sense that the criteria which are laid down for its application give it a harsh or unreasonable incidence with regard to either its subject-matter or objects. To describe a tax as arbitrary in the latter sense is to do so in a manner which does not go to its validity.

The submissions made by the defendant company, however, assert that the tax authorised by sec. 6(2) of the Act, which was not the subject of any particular attack in MacCormick v. F.C. of T., is arbitrary in the sense referred to in that case in that it may be imposed in an arbitrary manner. This is said to be so because liability to pay the tax may arise under the subsection for no other reason than that the Commissioner is of the opinion that it would be unreasonable that a relevant company otherwise liable should pay the tax.

As a matter of strict construction, sec. 6(2) does not operate to produce that result. The provisions of the subsection would, in the absence of the discretion - if an administrative opinion may be so described - vested in the Commissioner by para. (c), apply of their own force and would continue to apply until the incidence of the tax came to rest upon a person from whom the tracing process authorised by the subsection could be carried no further. It is the application, or further application, of that process which is made contingent upon the formation by the Commissioner of an opinion that it would be unreasonable that a relevant company should be liable to pay recoupment tax. The actual liability to recoupment tax based upon a secondary taxable amount under sec. 6(2) arises from the provisions of the subsection other than para. (c). The effect which that paragraph has as a matter of form is to provide for the relief of persons from a liability otherwise imposed upon them.

On the other hand, the effect in substance of para. (c) is to vest in the Commissioner an authority or discretion to determine the extent to which the process for which the subsection provides should apply and thus to determine the liability to tax of persons who would not otherwise be liable. In considering the defendant's submission, regard should, we think, be had to substance rather than form: see
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015; (1969) 119 C.L.R. 365.

Approaching the matter in this way, it is nevertheless the subsection itself and not the Commissioner which determines the identity of those persons who may be made liable to tax by the application of the tracing process. Having regard to the nature of the process, it cannot, in our view, be said that those persons might not validly be made the objects of the recoupment tax. Any argument to the contrary could only be upon the basis that there was insufficient connection between those persons and the subject-matter of the tax. In MacCormick v.

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ATC 4302

F.C. of T., at ATC pp. 4234-4235; A.L.J.R. p. 272; A.L.R. p. 61, the proposition that a law is not a law with respect to taxation unless there is a real connection between the objects of the tax and its subject-matter was doubted. However, assuming that the proposition was well founded, consideration was given in that case to the subject-matter of the recoupment tax and it was held that it is not a tax upon company profits, as is the company tax which is recouped, but is in each instance a tax upon a transaction which resulted in a company being stripped of its assets so as to be unable to pay its overdue company tax.

There is a real connection between the persons who might be made liable to pay recoupment tax under sec. 6(2) of the Act and the subject-matter of the tax because those persons form links in a chain which commences with a company which sold its shares in a target company, that being a transaction which led to the failure of the target company to pay its overdue company tax. It is plain enough that sec. 6(2) is aimed at those who benefited, or are likely to have benefited, from the transaction with the intention that one or other or some of them should bear the tax. Whether or not that aim is achieved in every case, a real connection between the persons identified by the application of the tracing process and the transaction can clearly be established, however remote some persons may ultimately prove to be. The tax imposed is none the less a tax even although it may operate harshly upon those who in fact received little or no benefit from the transaction: MacCormick v. F.C. of T.;
Herald and Weekly Times Ltd. v. The Commonwealth (1966) 115 C.L.R. 418, at pp. 436-437. Nor can it matter if, by the application of sec. 6(13), persons who were not in existence at the time of the transaction are made liable to pay recoupment tax under sec. 6(2). It is only persons who can be traced to the original transaction who can be made liable under sec. 6(2); indeed, the whole tracing process is designed to establish a connection between the transaction and the persons made liable. Whether the degree of connection is commensurate with the benefit actually received is not to the point. What is relevant is that a real connection is required by the subsection.

It seems to us that this view of the Act disposes of the defendant's demurrer. However, we should, perhaps, deal more specifically with the defendant's reliance upon the scope afforded to the Commissioner's opinion under para. (c). The submission is that in forming an opinion under para. (c) of sec. 6(2) the Commissioner is authorised or required to act in such a manner that recoupment tax imposed by reference to a secondary taxable amount is an arbitrary tax. It is not submitted that the incidence of a tax could not be made dependent upon the formation of an opinion by the Commissioner of the reasonableness of the result. Indeed, such a submission would not be possible in the light of the decision in Giris Pty. Ltd. v. F.C. of T. What is submitted is that the only matters which the Commissioner might take into account in forming an opinion under para. (c) are, because of the words ``by reason of a circumstance mentioned in paragraph (b),'' limited to the sale of the shares in a relevant company or in its holding company. This, it is said, confines the Commissioner to the sale and hence to a consideration of the situation of the relevant company or its holding company to the exclusion of the situation of persons otherwise contingently liable. Necessarily, the submission continues, an opinion formed upon that basis is arbitrary and any tax imposed as a result is arbitrarily imposed.

There are two answers to the submission. First, even if the forming of the opinion of the Commissioner is controlled as tightly as the defendant suggests, the result is not to produce an arbitrary tax. Indeed, the contrary might be supposed because the more limited the scope afforded to the Commissioner the more the statute itself determines the incidence of the tax. Secondly, the submission in any event takes too narrow a view of para. (c). True it is that the opinion which the Commissioner may form pursuant to that paragraph is of the unreasonableness of the relevant company's being liable to pay recoupment tax by reason of the circumstance that shares in it or in its holding company have been sold. But the question whether or not it would be unreasonable that a company should be so liable is not to be considered in isolation to the exclusion of relevant matters other than the sale itself. In particular, para. (c) does not exclude from the Commissioner's consideration the situation of any other person who would be made liable to pay recoupment tax, if, under sec. 6(2), a company should be relieved of

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ATC 4303

liability. Unreasonableness is a relative concept and its application requires the consideration of all the relevant circumstances. Such a consideration is not excluded by para. (c).

It may be unreasonable, by reason of a sale of shares in a company or in its holding company and having regard to that fact alone, that the same company should remain liable to pay recoupment tax. Clearly there may be circumstances in which, because of the sale, the present shareholders do not derive any benefit from the transaction which is the subject-matter of that tax. But whether or not it is unreasonable that the company should remain liable to pay recoupment tax falls to be determined by the Commissioner under para. (c) having regard to all relevant matters, including the reasonableness of the effect which any decision he might make may have upon other persons.

What may be unreasonable having regard only to the situation of the relevant company or its shareholders may not be unreasonable when considered in the context within which the Commissioner is required to form his opinion. That context is provided by sec. 6, in which subsec. (1), (2) and (3) should be read together. When so read, each is clearly part of an overall design to ensure that recoupment tax, when it has become payable, will be paid by some person or persons falling within the description provided by the legislation. If recovery from a company otherwise liable to pay is not possible because it has ceased to exist, or because it is insolvent, or if it is unreasonable by reason of a sale of its shares into different hands, then liability may be passed further along the chain which commences with the transaction which resulted in the stripping of the target company. The Commissioner is to be guided and controlled by the policy and purpose of the enactment and, whatever the width of his discretion, it is not unexaminable should he exceed the limits which may be discerned from its provisions: Giris Pty. Ltd. v. F.C. of T. The legislation does not contemplate the formation of an opinion by the Commissioner in an arbitrary manner and any attack upon it on that ground cannot, in our view, succeed.

The demurrer should be overruled.

Brennan J.: In
MacCormick v. F.C. of T. 84 ATC 4230; (1984) 58 A.L.J.R. 268; (1984) 52 A.L.R. 53, I expressed the view (at ATC p. 4245; A.L.J.R. p. 280; A.L.R. p. 76) that in imposing a tax Parliament was at liberty ``to select such criteria as it chooses, subject to any express or implied limitations prescribed by the Constitution, irrespective of any connection between them''. I remain of that view and I find it unnecessary - indeed, inappropriate - to consider whether there is a ``real connection'' between the persons who might be made liable to pay recoupment tax under sec. 6(2) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth) and the subject matter of the tax. Subject to that qualification, I agree with the reasons of my brothers for overruling the demurrer.