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Grant v. Federal Commissioner of Taxation.

Judges:
Yeldham J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 17 December 1985.

Yeldham J.

This is an appeal by a taxpayer from a decision of the Deputy Commissioner of Taxation upon the appellant's objection against an assessment of the income tax payable by him upon income derived during the year ended 30 June 1978. It raises matters of considerable difficulty and of substance and it is, so I am informed, the forerunner of many similar appeals. Although the appeal is that of Mr Grant only, Mr Bainton, his senior counsel, at the commencement of the hearing said:

``The basic question is whether three taxpayers, who practise in partnership as chartered accountants and who also for a period conducted a share trading business among themselves, are collectively entitled to a tax loss of $658,346 arising because the allowable deductions of the share trading business exceeded the assessable income of that business in the year ended 30 June, 1978 by that amount. They were equal partners in the business, so that each of them would be entitled in the assessment of his individual income to one-third of that amount.''

In order to properly understand and deal with the various questions which arise, it is necessary to set out the facts in a little detail.

Until 1 July 1978 the appellant, Errol George Chant and Desmond Livingstone Nicholl were equal partners in a firm of chartered accountants called Dulhunty Grant & Co., which, on 1 July 1978, merged with a larger firm. An adjustment sheet issued by the respondent in respect of the partnership return of Dulhunty Grant & Co. for the year ended 30 June 1978 disallowed the sum of $658,346 described as ``net loss on share trading''. An adjustment sheet in respect of the appellant personally made an adjustment of a loss of $144,781 to a profit of $74,668 ``in accordance with the adjusted partnership distribution'' and a penalty of $23,666.50 was imposed. It was common ground in the appeal that the penalty should not have been so imposed and that the appeal must succeed at least in relation to it, leaving in issue what was said to be the appellant's share of the ``partnership loss'' as defined in sec. 90 of the Income Tax Assessment Act 1936 as in force at the relevant time.

In about March 1978 the three partners of Dulhunty Grant & Co. had become concerned as to what they regarded as a potentially substantial tax problem which they would encounter as a result of the proposed merger. They agreed that the appellant should approach a solicitor experienced in taxation matters to ascertain if he had any proposals which might permit them to alleviate the incidence of the income tax which they contemplated they would otherwise have to pay. The solicitor advised that they should enter into a ``Curran'' scheme (the name being derived from the scheme upheld by the High Court in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409 in respect of which sec. 6BA, which applied to bonus shares allotted after 16 August 1977, was enacted in an endeavour to outlaw it). The solicitor said that by entering into such a scheme they would be able to obtain a deduction of $600,000; they were advised that for this to be successful it was necessary for them to become share traders, and in this regard they would be assisted by a firm of accountants, which was nominated by the solicitor. Thereafter, a Mr Shephard, an accountant, at the request of the solicitor, met with the appellant and Mr Chant and discussed with them the operation of a scheme in which the partners would entrust the share dealing activities to Mr Shephard. The latter required an initial contribution towards these activities of $6,600 and a limit was imposed by the appellant of $10,000 in relation to any one transaction in a public company. No limit was imposed in relation to private companies. Mr Shephard informed the partners that they would have to trade in shares in order to obtain the benefit of a ``Curran'' scheme and that such trading was part and parcel of the overall package.

On 3 April 1978 the partners entered into a share management agreement with Morlop Enterprises, a Hong Kong based company (which I will call ``Morlop''), which was described in the agreement as ``the manager'', under which the latter agreed to serve the partners as manager of the business of share trading of the partnership which it was to control and in respect of which it was to have the full power to make all decisions. The remuneration of the manager was fixed at $33,000 and it appears that this was not a recurring expenditure. It was to be ``payable in such manner... as may be agreed from time to

ATC 4808

time by the manager and the partnership''. This would represent five per cent of the sum of $660,000.

Two days later the partners paid to Morlop $6,600 to enable it to commence dealing in shares. Their motive, which the appellant submits is irrelevant, was plainly an endeavour, by virtue of the share trading business, to obtain a ``Curran'' deduction for tax purposes.

Subsequently certain shares were purchased on behalf of the partners. On 7 April 1978 a ``Curran'' scheme was implemented in respect of two companies, namely Inter Island Traders Pty. Limited and The Yanko Pty. Limited, which gave the partners a loss, at least on paper, of $660,065 in total. During April 1978 it became apparent that amendments to the Income Tax Assessment Act may well preclude the partners from relying upon the decision in Curran's case for the purpose of achieving the necessary losses which they sought. Accordingly the advice of the solicitors was sought as to some other method of achieving losses which could be set off against income. He indicated that he felt there was a variation on the former scheme which would achieve the desired result and that this would not cost them any more money.

Amanada Pty. Limited (``Amanada'') was incorporated on 7 June 1978 with an authorised capital of $100,000 divided into 100,000 shares of $1 each and a paid-up capital of two $1 shares. Senior counsel for the respondent described it as ``a shelf company utilised solely for the purpose of trying to obtain tax losses'', a description which senior counsel for the appellant described as ``a further example of the use of colourful expressions in lieu of legal analysis''.

Prior to the incorporation of Amanada the solicitor in question (Mr Baffsky) and Mr A.N. Wales, a chartered accountant and a partner in the firm of P.N. Burke & Co., who is also a director of Amanada, Huntspill Pty. Limited (``Huntspill''), Tonnegar Pty. Limited (``Tonnegar'') and First Minot Investments Pty. Limited (``First Minot''), had several meetings as a consequence of which Mr Wales prepared a ``check list'' to implement the new scheme, which was called ``Newcur''. Shortly thereafter he prepared a computer print-out which showed the number of shares which would be required by the various participants of the scheme to give them the desired loss, and for which they had paid.

In an affidavit which was filed in the proceedings, after referring to his meetings with Mr Baffsky in May 1978, Mr Wales said (inter alia):

``9. After these meetings I prepared forms of minutes, telephone instructions, and other documents which were required to implement the scheme. I also prepared forms of documents for the Northern Territory Register which were to be completed in Darwin. I also prepared pro forma telephone instructions intended to be given. These documents were sent by me together with the relevant forms of documents for the Northern Territory Register to Mr Graham Lewis of Peat Marwick Mitchell & Co. in Darwin. These documents were prepared to be executed in chronological sequence and were numbered in numerical order. I also prepared a `check list' to be used in the preparation of documents to ensure that all necessary steps were taken and in the current order...

10. In early June 1978 I had the following conversation with Mr Baffsky: He said: `I have spoken to Jim Grant and they want a `Newcur' for six hundred and sixty thousand. When you have the documents ready phone Des Nicholl and give him the exact details of what will be required.' I said: `Okay.'... I had the printout in front of me when I telephoned Mr Nicholl a few days prior to 22 June 1978.

I said to him: `We have organised for you to purchase shares in a company called Amanada Pty. Limited. We will require a cheque from you for $33.00 payable to Tonnegar Pty. Limited from whom you will be purchasing the shares. Can we have that cheque in our office this afternoon?' He said: `Yes.'

I then said: `We will be allotting to you 6,667 ordinary shares of $1.00 each at a premium of $99.00 per share. They will be paid up to one cent each and we will require a cheque for $666,633.33 on 27 June when a call will be made on these shares.'

He said: `How are we going to arrange to pay that amount of money?' I said: `We have organised for Huntspill Pty. Limited to

ATC 4809

loan to you $667,000.00 which will cover your payment. The loan will be interest free and you will be able to repay it from the sale of your shares. We will require a further cheque from you on 28 June 1978 made payable to Huntspill Pty. Limited in repayment of the loan and we will provide you with a cheque from First Minot Investments Pty. Limited for an amount of $666,766.00 which will repay the proceeds from the sale of your shares. I suggest you contact your bank manager and advise him that these payments will be going through.'

He said: `I will arrange for the Tonnegar cheque to be sent to you this afternoon and I will speak to the bank manager.'''

On 20 June 1978 at 9.04 a.m. Messrs Baffsky and Wales resolved to convene an extraordinary general meeting of the company to be held on the same day at 9.06 a.m. for the purpose of considering, and if thought fit passing, with or without amendment:

``(a) An ordinary resolution that the authorised capital of the company be increased from $100,000 divided into 100,000 shares of $1 each to $15,000,000 divided into 15,000,000 shares of $1 each;

(b) A special resolution that as from the time of the passing of such resolution the Articles of Association and the document initialled by the Chairman for identification be the company's Articles of Association in lieu of those which had previously been its Articles.''

The meeting was duly held at 9.06 a.m. and the two resolutions were passed. Mr Wales said in his affidavit that he caused the originals of the notice of resolution and notice of increase in share capital, each dated 20 June 1978, to be lodged with the Corporate Affairs Commission on the morning of 21 June and he waited until the member of the staff who had so lodged them informed him of the lodgment before arranging for a meeting of directors of Tonnegar to be held on 21 June at 10.30 a.m. At that meeting the directors resolved to apply to Amanada to take up 138,542 ordinary shares of $1 each of the capital in that company at a premium of $99 per share on terms that the said shares were issued and paid up to 1c only. The balance of 99c per share and the premium of $99 per share were to be at call in accordance with that company's articles of association. On 21 June 1978 at 10.32 a.m. the directors of Amanada resolved to allot 138,542 ordinary shares paid up to 1c per share to Tonnegar. Amanada received $1,385.42, and on 22 June the three partners bought 6,667 of those shares from Tonnegar for $33. On 22 June 1978 at 8.11 p.m. the directors of Amanada resolved, inter alia, that a transfer of 66,667 shares from Tonnegar to the partners be approved and entered in the company's Darwin register. That branch share register had already been opened pursuant to a resolution of the directors of Amanada at 12.30 p.m. on the same day, which meeting resolved also ``to transfer to that Register all of the ordinary shares, issued and un-issued, in the capital of the company''. The object of registering the shares in Darwin was to reduce New South Wales stamp duty.

On 23 June 1978 at 4.05 p.m. the directors of Amanada resolved that the unpaid amount of $99.99 on each of the 138,542 issued ordinary shares be called, payable on 27 June 1978. On that day a notice of the call requiring payment by the partners of $666,633.33 was made. As Mr Wales indicated in the conversation deposed to in para. 10 of his affidavit, which I have earlier set out, arrangements were made for a loan from Huntspill to the partners in the sum of $667,000 in order to enable payment of the call to be made. The bank statement of Huntspill shows a debit against that company on 27 June 1978 of $667,000. On 27 June 1978 also, at 8.01 p.m., the directors of Amanada authorised the issue of fresh share certificates on the Darwin register (inter alia) to the three partners (i.e. Messrs Grant, Nicholl and Chant) for 6,667 shares. On the same day an amount of $13,852,814.58 was paid to Amanada and this included the sum of $666,633.33 paid by the partners. On the same evening at 8.05 p.m. Amanada's directors resolved ``that the sum of $13,715,658 standing to the credit of the share premium account be applied in paying up 13,715,658 of the company's unissued ordinary shares of $1 each, and that such shares when so paid up be issued as fully paid bonus shares to the holders of the presently issued ordinary shares in the proportion of 99 bonus shares for each one ordinary share held on the date of this resolution''. At 8.06 p.m. on the same evening an instruction was sent to Darwin to allot 660,033 bonus shares fully paid to $1 to the appellant and his partners and this was done. At 5.08 p.m. on 28 June the directors of First

ATC 4810

Minot, being the same as the directors of Amanada, resolved to endeavour to purchase from the existing shareholders all the issued ordinary shares in the capital of Amanada for $13,855,582 plus any costs and expenses, and to appoint Mr Baffsky to endeavour to negotiate such a sale. It was resolved also to borrow $13,856,000 from Huntspill and this loan was made. At 5.10 p.m. on the same afternoon instructions were given to Darwin to transfer, inter alia, the 666,700 ordinary shares held by the appellant and his partners (i.e. 6,667 plus the 660,033 bonus shares) to First Minot. The consideration was $666,766. At 5.12 p.m. the directors of Amanada resolved that the share transfer and other share transfers be approved and entered in the company's Darwin register and that a certificate be issued on the Darwin register in the name of First Minot Limited for 13,854,200 shares. At 5.15 p.m. the directors of Amanada resolved that all issued shares on the Darwin branch register be transmitted to the Sydney register and that the Darwin branch register be closed. Later that day the partners repaid to Huntspill the loan of $667,000.

Thus the sequence of events, carried out in accordance with the ``flow chart'' (Ex. ``1''), was that Tonnegar was allotted 138,542 ordinary shares for payment of $1,385.42; the partners purchased 6,667 of these shares from Tonnegar for $33; Huntspill lent funds, free of interest, to the partners in the sum of $667,000 to enable them to pay the call; the partners paid the moneys called by Amanada; Amanada lent to Morlop $13,800,000; and Morlop lent to Huntspill $13,856,000, thereby establishing a substantial credit in the latter's bank account.

The sum of $658,346, described in the partnership adjustment sheet as ``net loss on share trading'' and disallowed by the respondent, was made up as follows: 

                                                    $
      Amount paid for 6,667 partly
      paid shares in Amanada                          33
      Plus call paid                             666,633
      Plus cost "of bonus shares
      issued"                                    660,033
                                              ----------
                                              $1,326,699
      Less the proceeds of sale                  666,766
      Profit on trading to 30-6-78
        (other than on sale of shares in
        Amanada)                                   1,554
                                              ----------
             Difference:                        $658,346
                                              ----------

The appellant claims that at the relevant time he was engaged in the business of share trading, an assertion which the respondent denied, and the amount claimed as his share of the ``partnership loss'' as defined in sec. 90 should have been allowed by virtue of the provisions of sec. 51(1), namely:

``(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.''

In sec. 90 ``Partnership loss'' was defined to mean ``the excess, if any, of the allowable deductions, except the concessional deductions and deductions allowable under section 80 or section 80AA in respect of losses of previous years, over the assessable income of a partnership, calculated as if the partnership were a taxpayer''.

The Commissioner, apart from denying that the outgoing claimed as a deduction on the acquisition of the bonus shares in Amanada fell within either the first or second limb of sec. 51(1) even apart from sec. 6BA (arguments which involved, inter alia, that the appellant was never engaged in carrying on business as a share trader), relied also upon sec. 260 (which ceased to have any operation from 27 May 1981) and asserted that the contract, agreement or arrangement between the various parties was absolutely void as against the respondent. The latter relied also upon sec. 6BA as inserted by Act No. 57 of 1978 (in support of his argument concerning sec. 51) and upon certain other matters which I will later mention. Was the appellant at the relevant time, a member of a partnership which carried on the business of share trading?

ATC 4811

If the answer to this question is in the negative, the appellant fails at the outset (except as to the penalty).

Section 6 of the Act, which affords little assistance in the present case, defines ``business'' to include ``any profession, trade, employment, vocation or calling, but does not include occupation as an employee''.

Prior to March 1978 the appellant was not a share trader and nor, apparently, were his partners. Between early 1978 and 31 December 1979 a large number of shares were purchased and sold on behalf of the partnership. But the critical question in the present appeal is whether, as at the latter part of June 1978, when the relevant transactions concerning the shares in Amanada occurred, the appellant then was engaged in the business of a share trader. There is no doubt that he and his partners only became interested in share trading because it was explained to them that this was a necessary ingredient for the purpose of implementing a ``Curran'' scheme, although both the appellant and Mr Chant did say that they desired if possible to make a profit from it. In the month of April shares were purchased in nine listed companies and sold in four such companies. In May purchases took place in twelve listed companies and there were sales in the same number of companies, and in June purchases of shares took place in five listed companies. To the extent that it is permissible to look at the situation after June there were, in the three months to 31 March 1979, purchases of shares in four listed companies and sales in the same number, and in the three months to 30 June 1979 purchases and sales occurred in six listed companies. In the six months to 31 December 1979 there were purchases of shares in two listed companies and sales of shares in eleven. By 31 December 1979 all the trading stock had been disposed of.

In
Ferguson v. F.C. of T. 79 ATC 4261 at pp. 4264-4265 Bowen C.J. and Franki J., in a joint judgment, dealing with whether the appellant there was carrying on a particular business, said:

``There are many elements to be considered. The nature of the activities, particularly whether they have the purpose of profit-making, may be important. However, an immediate purpose of profit-making in a particular income year does not appear to be essential. Certainly it may be held a person is carrying on business notwithstanding his profit is small or even where he is making a loss. Repetition and regularity of the activities is also important. However, every business has to begin and even isolated activities may in the circumstances be held to be the commencement of carrying on business. Again, organization of activities in a business-like manner, the keeping of books, records and the use of system may all serve to indicate that a business is being carried on. The fact that, concurrently with the activities in question, the taxpayer carries on the practice of a profession or another business, does not preclude a finding that his additional activities constitute the carrying on of a business. The volume of his operations and the amount of capital employed by him may be significant. However, if what he is doing is more properly described as the pursuit of a hobby or recreation or an addiction to a sport, he will not be held to be carrying on a business even though his operations are fairly substantial.''

In
F.C. of T. v. Westraders Pty. Ltd. 79 ATC 4089, again a decision of the Full Federal Court, Deane J. who, with Toohey J. formed one of the majority, said, at p. 4096:

``With the possible exception of a small holding of shares... none of the relevant shares had been acquired by Jensen in the course of the ordinary buying and selling operations of an unsophisticated trader in shares. They were acquired as part of what have, for convenience, been referred to as `dividend stripping' operations. The profit which was the object of their acquisition was to be derived more from the dividends which were ripe for the picking (either in the form of cash or, in two cases, in the form of land) than from the proceeds of the ultimate sale of the shares themselves. This circumstance did not, however, preclude the shares so acquired from constituting part of the trading stock of the business of dealing in shares which Jensen, at the time of the acquisition, carried on... The finding of the learned Judge at first instance that the shares, when acquired, were trading stock of that business was... plainly correct.''

In that case the members of the partnership in question carried on the business of share

ATC 4812

trading so that they could take advantage of the deduction to be made available by the utilisation of the provisions of sec. 36A as they then were, but the majority held, as had been held in many other cases, that the asserted ulterior motive was not relevant to the categorisation of the activities as share trading if, indeed, the proper conclusion, having regard to what was done, was that there was a trading in shares. Deane J. expressly held that motive or intention to seek an advantage different from that ordinarily derived by a share trader from transactions into which he entered did not require those activities to be described as other than share trading. In the same case Toohey J. expressed views to the same effect (at pp. 4100-4102). The decision of the majority was upheld in the High Court (80 ATC 4357; (1979-1980) 144 C.L.R. 55). Mason J. in the course of his judgment (at ATC pp. 4364-4365; C.L.R. p. 70) said:

``It is said that shares in private companies are not normally the subject of trading transactions, unlike, for instance, manufactured articles or commodities. No doubt it is true to say that shares in public companies are much more frequently dealt with by traders than shares in private companies, but I can see no reason why private company shares should lie outside the realm of share dealing. In recent years it seems that there has been a strong demand for various classes of private company shares, e.g. shares in loss companies and excess distribution companies. The fact that there are restrictions on the transfer of private company shares does not prevent a person from dealing in them.

The Commissioner... advances a number of reasons with a view to supporting the conclusion that Jensen, in acquiring shares after the 1972 year, was not motivated by a desire to make a profit on the resale of shares and that it was `on the take-over trail', bent on acquiring cheaply the assets of other companies...

However, neither the circumstance that Jensen was `on the take-over trail', whatever that colourful expression may mean, nor the fact that it derived special advantages from its acquisitions, not being the making of a profit on resale, nor the fact that the acquisitions took place in the course of carrying out `Division 7 schemes', is enough to justify the conclusion that Jensen was not, or had ceased to be, a share trader in the 1975 year.

The point is that Jensen engaged in diverse share trading activities...''

Mason J. referred, as did other members of the High Court, to what had been said on the same subject in
Investment & Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249 and in
F.C. of T. v. Patcorp Investments Limited 76 ATC 4225; (1973-1976) 140 C.L.R. 247. He quoted from the judgment of Walsh J. in the former case (at ATC p. 4150; C.L.R. pp. 270-271) the following passage:

``But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think that they are to be denied the description of trading stock, either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit.''

See also
Johns v. Wirsal Securities Ltd. (1966) 1 W.L.R. 462.

It is apparent that the determination of whether or not at the relevant time the appellant was carrying on the business of trading in shares is essentially one of fact, but considerations such as those referred to, in particular by Bowen C.J. and Franki J. in Ferguson's case, are plainly of critical importance.

The decision of Rogers J. in
Deane and Croker v. F.C. of T. 82 ATC 4112, upon which Mr Rolfe, senior counsel for the respondent in the present case, placed much reliance was essentially a decision upon the facts of that case in which his Honour rejected much of the evidence relied upon by the appellants.

Mr Rolfe submitted that in the present case the appellant was never engaged in carrying on business as a share trader and that it was, in reality, engaged only in the business of taxation avoidance, there being an absence of any commercial reality but rather the pursuit of substantial fiscal advantage only. He submitted

ATC 4813

that this conclusion followed from the fact that the appellant had not been a share trader prior to March 1978; he and his partners became interested in such trading only because they were informed that this was necessary for the purpose of implementing a ``Curran'' scheme; the share trading activities were committed to the management of a Hong Kong company (Morlop), the directors of which were unknown to the appellant; the amount of capital ventured was only $6,600; the appellant placed a limit of $10,000 on any one transaction in public share dealings but this limit was never reached and no limit was placed on private share dealings; the sale of shares between April and June 1978 was, in the case of public companies, in a total value of $18,078, yielding a profit of $329, and in private companies (being the three ``Curran'' companies) $4,235,587 yielding a profit of $1,358; Amanada was a non-trading company which only generated funds through ``round-robin'' transactions, and the only reason for dealing with such shares was tax avoidance; the appellant and his partners were never in reality exposed to any financial liability, nor was it intended that they should be; although the profit to 30 June 1978 was $856.20, if the three ``Curran'' transactions were excluded, such profit was purely incidental to the transaction and never a relevant part of any business; the so-called ``management fee'' of $33,000, all of which was brought to account in the financial year ended 30 June 1978 was not debited against share trading but against fees, and the proper conclusion was that it was based on the percentage of the tax losses sought to be obtained with no relationship to the business of buying and selling shares, save to the extent that it was considered necessary to try to make the ``Curran'' scheme work; and the appellant never properly explained why the amount of $33,000 was set-off against fees rendered rather than against profit returned. Mr Rolfe argued that upon the facts the proper inference to be drawn was that the appellant was never carrying on the business of share trading; alternatively he submitted that if he was, the private company transactions were not part thereof and the small commercial profit generated was merely incidental thereto and not the reason for such transactions.

However, I have come to the conclusion, notwithstanding the force of the submissions made on behalf of the respondent, that the share transactions were of such a nature that it is proper to regard the appellant at the relevant time as being engaged in the activity of share trading, even though not on a large scale, and even though the motive for trading in shares was plainly to obtain a substantial taxation deduction, and that the shares the subject of the various transactions are properly to be regarded as trading stock.

In my opinion each member of the partnership intended to carry on a business of share trading, as each was aware that such a business must be carried on if the tax deductions sought were to be achieved; I find also that each partner wished that the share trading would be profitable if possible; the number of shares purchased and sold between early April and late June 1978 was not insubstantial; they were purchased for sale in the course of trade rather than to be held as investments, and a number of them were clearly speculative stock; the trading involved repeated activities conducted in an organised manner by an experienced person, and it was conducted with some regularity. The matters which are of principal importance are adverted to in the passage in Ferguson's case in the joint judgment of Bowen C.J. and Franki J. to which I have referred. The irrelevance of motive or reason for indulging in the share transactions is plainly established by authorities, to some of which I have referred. Hence I conclude that the appellant was, at the relevant time, a member of a partnership which carried on the business of share trading. I do not consider that it is proper to hold that the private company transactions were outside the business because directed primarily to the object of lessening the burden of income tax rather than to commercial profit - see
Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106 at p. 118;
F.C. of T. v. Patcorp Investments Limited 76 ATC 4225 at pp. 4232-4233; (1973-1976) 140 C.L.R. 247 at pp. 253, 291-292;
Griffiths (Inspector of Taxes) v. J.P. Harrison (Watford) Ltd. (1963) A.C. 1 at pp. 11-12.

The application of sec. 51(1):

The case of the appellant is that he incurred certain outgoings for the purchase of shares, which became ``trading stock'' as defined in sec. 6(1), with the consequence that every purchase price was a sec. 51(1) deduction, every sale price was assessable income (sec.

ATC 4814

25(1)), shares on hand at the end of the year of income must be treated in accordance with sec. 28 and 29 and valued in one of the ways envisaged by sec. 31, and if, during the year of income a bonus issue was received, it was to be treated as having been bought at par value so that sec. 51(1) permitted a deduction of that amount. So much was decided in Curran's case itself (the decision in which was affirmed by the High Court in
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398 at pp. 4404-4405, 4411-4412; (1976-1977) 138 C.L.R. 106 at pp. 119 and 132-133). The effect of the decision in Curran is that it is appropriate for a share trader, one who buys and sells shares as an activity as distinct from investing in shares on capital account, to debit his trading account with the par value of a bonus issue. It will, of course, be necessary to consider the effect of sec. 6BA, which applies to bonus shares allotted after 16 August 1977, and which was enacted to endeavour to avoid the effect of the decision in Curran's case. The critical question is whether, in the light of the provisions of the Act as they stood in June 1978, the partnership of which the appellant was a member is entitled, under sec. 51(1), to a deduction in respect of the ``cost'' of $660,033 applied to the 660,033 bonus shares in Amanada issued to the partnership.

Because I am of the opinion that, subject to a consideration of sec. 6BA, and leaving aside the question of the application of sec. 260, the ``cost'' of the bonus shares in Amanada issued to the partnership does, by the application of the principles decided in Curran's case, come within the second limb of sec. 51(1), it is not necessary to refer to a number of the arguments and the authorities cited by Mr Rolfe in connection with the first limb of that section. The fact that the loss or outgoing in the present case, assuming it to be one, was solely for the purpose of obtaining a tax loss or advantage does not, in my opinion, disentitle the appellant to the benefit of sec. 51(1), subject only to the possible application of sec. 6BA and of sec. 260. In this respect I entirely agree with what was said by Hunt J. in
Gwynvill Properties Pty. Limited v. F.C. of T. 85 ATC 4046 at p. 4053, namely:

``A decision by a taxpayer to adopt a particular means of carrying out a specific transaction in order to obtain a tax advantage which would not have been obtained if the transaction had been carried out in a different way does not deny to that taxpayer the benefit of sec. 51(1), subject only to the possible application of sec. 260... The authorities for that statement are legion...''

Plainly the subjective purpose of the appellant and of his partners was to derive a tax benefit but that, in my view, is of no relevance when the second branch of sec. 51(1) is under consideration. If a loss or outgoing is necessarily incurred in carrying on a business for the purpose of gaining or producing such income, the fact that the motivating force is the desire of the person carrying on the business to obtain allowable deductions does not preclude the application of the subsection. Motive as distinct from purpose is irrelevant - see
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542. I am satisfied that in the present case the purpose of the appellant in buying and selling shares was to carry on a share trading business, notwithstanding that his motive was an endeavour, in the course of that share trading business, to obtain a ``Curran'' deduction. The cost of the shares sold (including the ``Curran'' cost), subject again to a consideration of the other sections of the Act to which I have adverted, was plainly relevant and incidental to the production of the assessable income which is the consideration received on the sale of the shares - a total of $4,271,665 to 30 June 1978.

The application of sec. 6BA:

This section, which was inserted by Act No. 57 of 1978, is in these terms:

``6BA(1) Where -

  • (a) a dividend (including an amount debited against an amount standing to the credit of a share premium account) is payable to a taxpayer by a company in respect of shares (in this section referred to as the `original shares') in the company;
  • (b) the company issues other shares (in this section referred to as the `bonus shares') to the taxpayer; and
  • (c) the amount of the dividend payable to the taxpayer is applied by the company, in whole or in part, in payment or part payment of the moneys payable by the taxpayer in respect of the

    ATC 4815

    bonus shares or the dividend is otherwise satisfied, in whole or in part, by the issue of the bonus shares,

then the following provisions of this section have effect for the purposes of this Act other than section 26AAC and sub-section 79(23).

(2) Subject to sub-section (4), any part of the dividend that is applied by the company in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or is otherwise satisfied by the issue of the bonus shares shall not be treated as being an amount paid or payable by the taxpayer in respect of the bonus shares or as in any other way constituting any part of the cost to the taxpayer of the bonus shares.

(3) Subject to sub-section (4), in determining -

  • (a) where any of the original shares or any of the bonus shares are articles of trading stock of the taxpayer and the taxpayer elects, under sub-section 31(1), in respect of all or any of the shares that are articles of trading stock, to adopt the cost price of those shares as being the value of those articles of trading stock - the value of those articles of trading stock; and
  • (b) where any of the original shares or any of the bonus shares are not articles of trading stock of the taxpayer - the amount of any profit or loss arising on the sale or disposal of any of those shares,

any amounts paid or payable by the taxpayer in respect of the original shares (whether on purchase of the shares, on application for or allotment of the shares, to meet calls or otherwise) shall be deemed to have been paid or to be payable by the taxpayer in respect of the original shares and the bonus shares in such proportions as the Commissioner considers appropriate in the circumstances.

(4) Sub-sections (2) and (3) do not apply -

  • (a) in the case of a taxpayer being a person other than a company or being a company that is a non-resident but not being a trustee of a trust estate - to the extent (if any) that a part of the dividend that is applied by the company in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or is otherwise satisfied by the issue of the bonus shares has been or will be included in the assessable income of the taxpayer of any year of income, either directly or through any interposed partnerships or trusts; or
  • (b) in the case of a taxpayer being a trustee of a trust estate - to the extent (if any) that a part of the dividend that is applied by the company in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or is otherwise satisfied by the issue of the bonus shares has been or will be included in the net income of the trust estate in respect of which the trustee is liable to be assessed and to pay tax.''

``(2) Section 6BA of the Income Tax Assessment Act 1936 applies in every case where the bonus shares referred to in that section were or are allotted after 16 August 1977.''

Plainly it was directed to the decision of the High Court in Curran's case.

In sec. 6(1) ``dividend'' is defined ``unless the contrary intention appears'' to include:

  • ``(a) any distribution made by a company to any of its shareholders, whether in money or other property;
  • (b) any amount credited by a company to any of its shareholders as shareholders; and
  • (c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits,

but does not include -

  • (d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of sub-section (4), does not apply), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company;
  • ...''

ATC 4816

The same section defines ``paid'' in relation to dividends to include ``credited or distributed''.

On behalf of the appellant it was submitted that what was done in relation to the issue of bonus shares in Amanada did not amount to a dividend for the purpose of the Act, and that hence sec. 6BA is of no relevance, leaving the principles of the Curran decision to operate in his favour.

On behalf of the respondent it was submitted that sec. 6BA(1)(a) incorporates an extended definition of ``dividend'' for the purposes of that section, so that it includes ``an amount debited against an amount standing to the credit of the share premium account'' and that hence, to that extent, the definition of ``dividend'' in sec. 6(1) is of no operation. It was argued that in the events which happened in relation to the shares in Amanada purchased by the appellant and his partners from Tonnegar, with a potential liability of the call and premium of 99.99c per share and the resultant creation, in part, of the share premium account and the issue of the bonus shares, payment for the latter by debiting an amount against the share premium account of the appellant constituted, by reason of sec. 6BA(1), payment of a dividend. Mr Rolfe submitted that because a bonus share could only be issued to the holder of ordinary shares in the company, in so far as an amount is debited against a credit in the share premium account (which for the purposes of sec. 6BA is a dividend) in payment for bonus shares it is payable to the appellant ``in respect of'' the original shares. A number of cases which speak of the width of the expression ``in respect of'' and which are well known were cited. Thus, so the argument continued, sec. 6BA(2) denied to the appellant the deduction which he claimed.

On the other hand Mr Bainton submitted that sec. 6BA was of no relevance because no ``dividend'', either as defined, or at all, ever became payable to the partnership by Amanada by respect of any shares. The bonus shares were issued as fully paid up by debiting the par value to the share premium account as sec. 60(2)(a) of the Companies Act, 1961 authorised it to do. He submitted also that, as a matter of construction, the words in brackets in sec. 6BA(1)(a) were not intended to amplify the definition of ``dividend'' in sec. 6(1) and that the provisions of para. (d) of that definition excluded from the operation of sec. 6BA the moneys applied in the present case for payment for the bonus shares.

Mr Bainton argued that, in view of the fact that the expression ``dividend'' is defined in considerable detail, and in a manner which goes well beyond the ordinary concept of that expression in sec. 6(1), and because, in many other sections of the Act, particular words are expressly defined for the purposes of those sections, or of the parts of the Act in which they appear, the conclusion is inescapable that, in relation to sec. 6BA, the words appearing in brackets in subsec. (1)(a) were not intended to amplify the definition of ``dividend'' in sec. 6(1) and in particular para. (d) thereof. He argued that the concern of the draftsman in inserting into sec. 6BA(1)(a) the words in brackets, i.e. ``(including an amount debited against an amount standing to the credit of a share premium account)'', must have been to ensure that the amendment was seen to comprehend not only a dividend of the type with which Curran's case was concerned (i.e. a dividend paid wholly out of profits arising from the sale or revaluation of assets not acquired for resale at a profit, and therefore exempt under sec. 44(2)), but also a dividend which is met from an amount standing to the credit of the share premium account. Mr Bainton submitted that the reference to a dividend ``payable'' in sec. 6BA would not extend to a dividend described in the words in brackets unless it were also a dividend (as it could be) as defined in sec. 6(1).

However, notwithstanding the force of the submissions of Mr Bainton, I am of the opinion that, as a matter of construction of sec. 6BA, the words in brackets in subsec. (1)(a) indicate a clear legislative intention that the word ``dividend'' wherever used in the section is to be extended to include ``an amount debited against an amount standing to the credit of the share premium account'', notwithstanding the exclusion of such amounts in the definition in sec. 6(1), which must give way to a contrary intention. To accede to the submissions made on behalf of the appellant on this aspect of the matter would be in substance to ignore or give no effect to the words in brackets in subsec. (1)(a). It would, no doubt, have been preferable to have adopted the method used in many other sections of the Act to which Mr Bainton referred me, when giving special or extended meanings, or perhaps limited meanings, to the

ATC 4817

various words. Nor do I overlook the use of the expression ``payable'' in sec. 6BA(1)(a), which is not entirely appropriate to the words contained in brackets. But none the less I am clearly of the view that the legislative intention was to include debits to credits appearing in share premium accounts in the expression ``dividend'' wherever it appears in sec. 6BA. The drafting is somewhat inartistic, but the only construction which I can place upon the words is that for which the respondent contends. I do not think it is permissible to use in aid of the construction for which the appellant contends the later amendment made to sec. 6BA by Act No. 146 of 1979 to which counsel referred, by which the words ``an amount'' was substituted for ``a dividend'' and for the words in brackets.

Mr Bainton argued that in any event no dividend, whether as defined in sec. 6(1) or within the wider meaning for which the respondent contended and which I have held to be correct, became ``payable'' (whether by being paid or by being credited) to the partnership in respect of any shares in Amanada. This argument asserted that what happened, in reliance upon sec. 60(2)(a) of the Companies Act, 1961 was that in the resolution of 27 June 1978 the directors of Amanada resolved ``that the sum of $13,715,658 standing to the credit of the share premium account be applied in paying up 13,715,658 of the company's unissued ordinary shares of $1 each and that such shares when so paid up be issued as fully paid bonus shares to the holders of the presently issued ordinary shares in the proportion of 99 bonus shares for each one ordinary share held on the date of this resolution'' and that this was done. It follows, so counsel submitted, that no part of the sum of $13,715,658 became ``payable'' (or was paid or credited) to the partnership or to any other shareholder in Amanada, and that the whole of the debit to the share premium account was credited directly to ``uncalled capital'', there being no suggestion that this was not the proper and appropriate accounting treatment of the transaction.

However, it is to the substance, the reality, of the transaction that regard must be had. The shares purchased by the appellant and his partners from Tonnegar had a potential liability of a call at a premium of 99.99c per share. I think it is correct to conclude, as Mr Rolfe submitted, that the payment of $666,633.33 on behalf of the partnership in response to the call created, in part, the share premium account of $13,715,658, notwithstanding the credit to ``uncalled capital'' of the whole of the debit to the share premium account. The various steps taken and the financial transactions which I have earlier outlined constituted, in my opinion, the amount paid in respect of the bonus shares by the partnership a dividend within the expanded meaning in sec. 6BA. The book entry upon which the appellant relied could not alter the essential nature of the transaction, which was that payment for the bonus shares was effected by debiting the cost against amounts which the partners were entitled to have credited to them in a share premium account, for the establishment and operation of which sec. 60 of the Companies Act, 1961 made provision.

Mr Bainton submitted also that, in any event, the ``original shares'' (see sec. 6BA(1)(a)) could only be those issued at 1c and subsequently called up. This was because the partners were registered jointly as the holders of the shares, and sec. 6(1) defines ``taxpayer'' as ``a person'' deriving income, a description which does not apply to a partnership of three, which does not pay tax. Mr Bainton argued that in the present case no dividend could be found ``payable to a taxpayer'' and hence sec. 6BA could not apply.

However, in my opinion, if a dividend is payable to three joint holders of shares, it is payable to each of the owners of the shares. In the event that they are partners, Div. 5 of Pt III of the Act ensures that it is only the individual interests of the partners in the net income of the partnership which is liable to taxation. But I do not think it is correct to say that because the partners in the present case were jointly registered as the holders of the shares in Amanada, no dividend in the sense of the expanded definition in sec. 6BA was ``payable to a taxpayer''. The shares were held by the partners at law as joint tenants - see
Buchan v. Nash (1983) 2 N.S.W.L.R. 575. Thus I reject the submission, which was but little developed in the written argument, and for which no authority was cited.

In these circumstances, and because the effect of sec. 6BA in the present case was to preclude the appellant from obtaining the deduction under sec. 51 to which the decision

ATC 4818

in the Curran case would otherwise have entitled him, I do not consider it is necessary to deal with the other matters argued, but I merely record them in the event that my opinion should be held to be erroneous. The respondent relied heavily upon the provisions of sec. 260 of the Act and argued that the contract, arrangement or agreement entered into between the various parties was absolutely void as against him. He argued also that the appellant had failed to discharge the onus imposed upon him to show that the resolution to increase the share capital of Amanada was registered, so that the bonus shares could be issued at the time when they were - i.e it had failed to establish that it had any shares to issue to fulfil the bonus share issue at the relevant date, reliance in this respect being placed upon sec. 21(1) and (3) of the Companies Act, 1961, which was the legislation in force at the relevant time. Reliance was also placed upon sec. 67 of the Companies Act, 1961, which prohibited a company giving direct or indirect financial assistance for the purchase or subscription of shares in such company, and it was contended by the respondent that this prohibition was breached in the present case in respect of the paying up of the subscription and premium moneys by the partnership, and that the transaction was illegal and void for that reason - see
D.J.E. Constructions Pty. Ltd. v. Maddocks & Ors (1982) 1 N.S.W.L.R. 5 at pp. 13 and 21. Finally, it was submitted that the transactions relied upon by the appellant were a sham within the principle enunciated by Diplock L.J. (as his Lordship then was) in
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802. Interesting and difficult though these submissions are, I do not think that any useful purpose is to be served by dealing with them because, for reasons which I have given, the appeal must fail, save as to the penalty imposed.

During the course of the opening address of counsel for the appellant on the first day of the hearing, it was conceded by senior counsel for the respondent that, in view of a recent decision of the Full Federal Court in
F.C. of T. v. Sahhar 85 ATC 4072, the Commissioner was not empowered to impose a penalty, which in the present case amounted to $23,666.50, because sec. 226(2) applies only to a taxpayer who makes an offending claim in ``his return'' and does not apply if the claim is made in the partnership return.

The consequence of the foregoing is that the appeal is dismissed, except as to the additional tax of $23,666.50, and I order that the assessment be amended by deleting such additional tax. So far as costs are concerned, the appellant has failed in his challenge to the disallowance of his share of the alleged partnership loss in respect of the bonus shares in Amanada, although he did succeed on some of the issues argued. His entitlement to succeed in relation to the additional tax was conceded at the outset. In these circumstances I think it is appropriate to order that the appellant pay four-fifths of the costs of the respondent of this appeal.


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