McLean v. Federal Commissioner of Taxation.
Judges:Tadgell J
Court:
Supreme Court of Victoria
Tadgell J.
The appellant, Mr Kenneth Ian McLean, challenges the disallowance by the respondent of an objection to his assessment to income tax for the year ended 30 June 1977. The disallowance was of a claimed deduction of $25,043 said to have been incurred by the appellant as a trading loss in the capacity of a member of a partnership called Tactown Trading Co.
According to his 1977 return of income, the appellant's occupation was ``partner - licensed grocery'' and he lived at Traralgon, Victoria. His accountant was Mr G.J. Jacobs, a member of the firm of J.B. Logan & Co., chartered accountants of South Yarra. In April
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or May 1977 that firm became aware, according to Mr Jacobs, ``that there were some share trading arrangements available to taxpayers like Mr McLean that may be able to offset his taxable income''. In May 1977 or thereabouts Mr Jacobs brought the appellant in touch with the promoters of a scheme described in evidence by one of them, Mr Colin Halley Coghill, as ``a section 36A trading partnership'' that was designed to minimise income tax. The appellant's introduction came through Mr R.D. Davidson, a member of the city firm of Messrs Home, Wilkinson and Lowry, solicitors.On 24 June 1977 Mr Jacobs and the appellant, together with about a dozen others, attended a meeting at the offices of Mr Garrick Lewis Gray, solicitor, at 570 Bourke Street, Melbourne, at which the Tactown partnership was formed with the appellant as a member. The minutes of the meeting record that it lasted less than half an hour and, so far as appears, it was the only meeting of the partners held in the 1977 calendar year. The appellant had no other relevant involvement in the conduct of the partnership, for its affairs were left in the hands of a management committee consisting of a company called Taclor Pty. Ltd. (represented by Mr Coghill), Mr Davidson and Mr A.I. Sinclair, a chartered accountant and a member of the city firm of Duesbury, Johnston and Marks.
The partnership deed of Tactown Trading Co., dated 24 June 1977, records that there were twenty partners - five individuals and fifteen companies - including Taclor Pty. Ltd., which was controlled by Mr Coghill and Mr Gray, the promoters. The deed recited that ``the Partners have agreed to enter into partnership in the business of traders and dealers in shares, share options, stocks and other securities including the purchase and sale of the same and interests in the same...''. The partnership was expressed by the deed to commence on 24 June 1977 and, subject to the terms of the deed, to continue until 24 June 1978. The initial capital of the partnership was expressed to be $315,760, contributed by Taclor Pty. Ltd. as to 5% by way of designated shares in various publicly-listed and non-listed companies (including those specified in Pt C of the second schedule to the deed) and by the other partners by way of various cash amounts. The appellant's capital contribution was stated to be 1.863% - $5,883.
Clause 4(d) of the deed provided that:
``Unless within one month from the date hereof the companies referred to in column 1 in Part C of the second schedule have:
- (i) issued to Taclor a share or shares of a class separate and distinct from all other issued shares of such company respectively; and
- (ii) respectively declared and paid dividends on the shares referred to in sub-paragraph (i) hereof in the amounts set out in column 4 of Part C of the second schedule -
then Taclor shall be credited with and deemed to have contributed as capital of the partnership a further amount being the difference between:
- (x) the total of the amount set out in column 4 of Part C of the second schedule; and
- (y) an amount equal to the dividends (if any) that have been declared and paid by that date on shares of the kind referred to in sub-paragraph (i) hereof.''
Part C of the second schedule to the deed provided as follows:
``No. & Classification Amount Amount of Name of Company of Shares Credited Dividend $ $ $ Bayswater Furniture Pty. Ltd. 9,000 Ordinary $2 shares 14,400.00 931,503 R.D. Collier Pty. Ltd 1 `A' class $2 share 1.60 R.D. Collier Pty. Ltd. 1 `B' class $2 share 1.60 R.D. Collier Pty. Ltd. 1 `C' class $2 share 1.60 R.D. Collier Pty. Ltd. 1 `D' class $2 share 1.60 R.D. Collier Pty. Ltd. 1 `F' class $2 share 1.60 134,314 Spencer Limited 100 `B' class $1 shares 80.00 36,900
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No. & Classification Amount Amount of Name of Company of Shares Credited Dividend $ $ Starke Limited 100 `B' class $1 shares 80.00 90,000 Stroud Limited 100 `B' class $1 shares 80.00 60,500 Sykes Limited 100 `B' class $1 shares 80.00 140,397''
Clause 5 of the deed provided that:
``The assets contributed to the partnership by Taclor shall be trading stock of the partnership and the partnership shall deal with the same accordingly. The partnership shall from time to time as required purchase or otherwise acquire other shares and marketable securities as shall appear suitable to the partners for the purpose of the business of the partnership of trading in shares and marketable securities.''
Clause 6(c) of the deed provided, in effect, that all property of the partnership should be held by Mr R.D. Davidson in trust for the partnership. By cl. 9(a) it was provided that:
``The partners shall be entitled to and shall share in the assets and profits of the partnership business and shall be responsible for all liabilities and bear all losses in the proportions set out beside their respective names in the second schedule hereto PROVIDED THAT if any further amount is credited to the capital account of Taclor pursuant to clause 4(d) hereof, the proportionate interest of the partners respectively in the capital of the partnership shall be adjusted accordingly, but their respective proportionate interest in the losses and profits of the partnership shall remain as set out beside their respective names in Part A of the second schedule.''
It was provided by cl. 11(e)(2) that the management committee should ``only purchase on behalf of the partnership fully paid shares in limited and/or no liability companies and then only to the extent of $10,000 cost in the case of each such company''.
Mr Coghill in his evidence described himself as a chartered accountant whose clients were entirely or principally what he described as ``internal''. He practised under his own name at the 9th floor, Marland House, 570 Bourke Street, Melbourne and in Sydney, but said that ``it was not really a traditional accountancy practice as such'', and that it did not make profits. The precise nature of the relationship between Mr Coghill and his business associates did not emerge directly in evidence, but he did say that he and they ``shared the profits of the tax minimization business, which was our business''. Those associated with Mr Coghill at the 9th floor premises at Marland House included two other accountants, Mr J.F. Edwards and Mr M.J. Sheedy. There was a very close association between Mr Coghill's staff or associates at those premises and Mr Gray, whose offices were on the 10th floor of Marland House. Mr Gray gave no evidence, but it is to be plainly enough inferred that he was an important principal of the ``tax minimization business'' of which Mr Coghill spoke; the two were promoters not only of the Tactown partnership, but of a number of other partnerships of a similar kind. The evidence shows that they regarded themselves, in the capacity of promoters of the Tactown partnership, as offering, for a fee, a service to the 19 individuals and companies (other than Taclor Pty. Ltd.) who became members of the partnership. The service represented an attempt to provide a tax deduction for the year of income ending on 30 June 1977; and the amount of the deduction was directly governed by the amount contributed by a member as partnership capital. There can be no doubt, therefore, that the partnership was formed with a view to its generating a taxation loss, at least in the year ended 30 June 1977, in order to provide the service its promoters claimed to offer. The partnership's claimed loss for that year (i.e. during the first seven days of its life) was recorded in the partnership's income tax return as $1,344,245. The appellant, in his own income tax return, claimed as a deduction under sec. 92 of the Income Tax Assessment Act his due proportion (1.863%) of that loss - $25,043. It was the disallowance of that claim that provoked this appeal.
Reduced to fundamentals, the scheme of the Tactown partnership required that Taclor should contribute as capital assets to the partnership a body of publicly-listed shares and
ATC 4292
shares in non-listed companies holding undistributed current-year profits or capital profit reserves. The non-listed companies were those specified in Pt C of the second schedule to the deed and the amounts credited to Taclor were as there set out, subject to cl. 4(d). The amounts of the dividends referred to in cl. 4(d) and specified in Pt C of the second schedule were, of course, related to the undistributed profits or capital profit reserves. The scheme was evidently designed with a view to exploiting sec. 36A(1) of the Income Tax Assessment Act, so that sec. 36(1) would apply to or in relation to the non-listed shares introduced as capital by Taclor ``as if'' Taclor had on the date of the commencement of the partnership disposed of the whole of the shares, being its trading stock, to the members of the partnership: sec. 36A(1). Section 36(1), if it applied, would require that the market value of the shares on that date should be included in the assessable income of Taclor and that the partnership should ``be deemed to have purchased'' the shares at a price equal to that value: see the terms of sec. 36(1) and (8). The market value was determined by reference again to the undistributed profits or capital profit reserves - i.e. cum dividend. The scheme contemplated that the shares should be reduced in value by the declaration of the dividends specified in Pt C of the second schedule to the deed, none of which the partnership was to receive, and then sold by the partnership for a price referable to the value so reduced.The dividends referred to in Pt C of the second schedule were declared in favour of Taclor (or, as it happened in one case, in favour of an associated company, Jensen Limited) within the time prescribed by cl. 4(d) of the deed and by 30 June 1977; and the shares in the subject companies held by the partnership were then sold for what they were reckoned to be worth after the declaration of the dividends. In essence, the partnership loss claimed for taxation purposes was the difference between the amounts realized by the partnership for the shares contributed by Taclor and the deemed cost of the partnership (market value) of those shares. These amounts were calculated, in effect, without reference to the undistributed profits or reserves - i.e. ex dividend. The scheme was said by Mr Coghill to have been inspired by, and it was sought that it be essentially assimilated to, the scheme that was later scrutinized by the High Court in
F.C. of T. v. Westraders Pty. Limited 80 ATC 4357; (1979-1980) 144 C.L.R. 55.
The foregoing statement describes the matter at its simplest, but the scheme was in fact exceedingly elaborate. In addition to the shares in the six companies referred to in Pt C of the second schedule to the deed, the partnership held in the 1977 tax year shares in a number of listed public companies and in another proprietary company, Walker Heating Pty. Ltd., and showed a small book profit on acquisitions and sales in that year. The acquisitions and sales by Tactown were treated as dealings in trading stock. Its taxation return was prepared on the footing that the partnership was a share trader and the nature of its business was described therein as ``share trading''. Indeed, the notion that Tactown was a ``s. 36A trading partnership'' carried with it as essentials to the success of the scheme the requirements that it carried on the business of a share trader, that the shares contributed to its capital by Taclor and those otherwise acquired should be regarded as trading stock in terms of sec. 28 of the Income Tax Assessment Act and that section and sec. 51 applied to permit a deduction of losses. Upon that footing, the partnership's claimed loss for taxation purposes was calculated thus:
$ $
Book profit 2,413
Add
(1) Stock introduced by Taclor
-- listed public companies 1,069
-- non-listed companies per Pt C, second schedule 14,815
(2) Purchases
-- listed public companies 9,520
-- Walker Heating Pty. Ltd. 1,128,007 1,153,411
--------- ----------
$1,155,824
Before the meeting of 24 June 1977 Mr Coghill calculated, having regard to the various tax deductible losses which each of the members other than Taclor desired to incur for the 1977 year, that the tax deductible loss the partnership, once formed, should aim to incur in that year was $1,342,105. The projected losses to be shared (or enjoyed) by each of the partners other than Taclor ranged from $200,000 (14.902%) to $15,000 (1.118%), amounting in all to $1,275,000 (95%). The remaining 5% of the loss - a balancing figure of $67,105 - was theoretically to be borne (or enjoyed) by Taclor, the so-called ``vehicle''. Of the 95% of partnership capital to be provided by ``outside'' partners or clients, only an amount equal to 1% of the required tax loss was to be actually paid in cash. In the appellant's case, since he required a tax loss of $25,000 (1.863% of the total), this was $250 and the total cash to be contributed by the partners (apart from Taclor) was $12,750 - i.e. 1% of $1,275,000. The remaining cash capital was advanced by a company called Pyramul Pty. Ltd. by way of unsecured loan to each partner (except Taclor) for six months at interest of 10% p.a. The amount provided by Pyramul was therefore $5,633 for the appellant and $287,222 in all, which amount had in fact been advanced unsecured by the partnership to Pyramul for the purpose. The effective working capital of the partnership at material times (leaving aside the debt owed to it by Pyramul) was therefore $12,750, together with the shares contributed by Taclor. In addition to his cash capital contribution of $250, the appellant incurred a fee of $3,250 and the partners incurred in all fees of $139,100 to Taclor for the privilege of entering into the partnership.
The foremost argument for the respondent in support of the appellant's disputed assessment was that the Tactown partnership was not entitled, in the calculation of its net income for the 1977 year, to have any sum taken into account pursuant to sec. 28, or to any deduction under sec. 51, in respect of the acquisition and disposal of shares. The reasons assigned were that the partnership was not carrying on a business of trading in shares during the relevant year and that the shares were not trading stock of any business carried on by the partnership. These contentions were necessarily put directly in issue.
I turn first to consider the question whether Tactown was, at the relevant time, carrying on a business of trading in shares. This is a question of fact and is to be determined by reference to the partnership deed, but also by reference to what was done following its execution and in preparation for its execution. I have already referred to the relevant portions of the deed and to some of the preparation which preceded its execution and in preparation for its execution. I have already referred to the relevant portions of the deed and to some of the preparation which preceded its execution on 24 June 1977. A consideration of the transactions into which Tactown ostensibly entered following its formation and until 30 June 1977 throws light on the detailed work that was done by the promoters before the execution of the deed; for most of the transactions in the last week of June 1977 were really only the formal culmination of some months of intensive groundwork.
Tactown's dealings from 24 to 30 June 1977 may be conveniently considered in five groups: (A) dealings with shares of listed public companies; (B) dealings with shares in Bayswater Furniture Pty. Ltd.; (C) dealings with shares in R.D. Collier Pty. Ltd.; (D) dealings with shares in the four Norfolk Island companies, Spencer Ltd., Starke Ltd., Stroud Ltd. and Sykes Ltd.; (E) other miscellaneous dealings.
(A)Dealings with shares of listed public companies
None of the publicly-listed shares contributed by Taclor to the partnership upon
ATC 4294
its formation (at a cost of $1,069) was sold in the 1977 tax year. According, however, to a ledger sheet relating to an account of the partnership with Messrs May and Mellor, stock and share brokers of 351 Collins Street, Melbourne, the following transactions occurred from Friday 24 to Thursday 30 June 1977:- - 500 Western Mining Corporation Ltd. shares were bought on 24 June for $827.40 and sold on 27 June for $777.66;
- - 1,000 North Broken Hill Ltd. shares were bought on 24 June for $1,156.60 and sold on 27 June for $1,107.27;
- - 1,000 Woodside Burmah Oil N.L. shares were bought on 24 June for $878.95 and remained unsold at 30 June;
- - 150 BHP Co. Ltd. shares were bought on 27 June for $995.08 and sold on 28 June for $925.18;
- - 200 Rennison Ltd. bonus shares were bought on 27 June for $992 and sold on 29 June for $900.50;
- - 200 Peko-Wallsend Ltd. shares were bought on 27 June for $1,226.30 and sold on 30 June for $1,140.85;
- - 200 Pancontinental Mining Ltd. shares were bought on 27 June for $2,472.20 and 50 more were bought on 30 June for $611.68, all remaining unsold on that date;
- - 2,000 International Oil Ltd. shares were bought on 27 June for $361.20 and sold on 28 June for $344.80.
Neither Mr Coghill nor Mr Sinclair was prepared to offer, in the course of evidence, any sensible commercial or other reason for these apparently unrewarding transactions; and counsel for the appellant claimed none. Mr Coghill characterized the sales as ``bad trading'', ``bad business'' and ``a mistake''. The other individual member of the management committee, Mr Davidson, the solicitor, was not called as a witness. There was a suggestion that the transactions were recommended by a Mr Colquhoun, presumably a member of the firm of Messrs May and Mellor, but again he was not called to give evidence. I shall return to these transactions later for an assessment of the light, if any, they throw on the nature of Tactown's business.
(B)The dealings with the Bayswater Furniture Pty. Ltd. shares
The partnership deed provided that Taclor should contribute as capital to the partnership 9,000 ordinary shares of $2 each in the capital of Bayswater Furniture Pty. Ltd., that it should be credited with $14,400 for them and, unless a dividend of $931,503 were declared and paid upon new shares in the capital of the company to be issued in favour of Taclor, that it be credited with a further amount of up to $931,503: cl. 4(d) and Pt C of the second schedule. New shares in the capital of Bayswater Furniture were apparently issued to Taclor and a dividend thereon of $931,503 was apparently declared and paid on 30 June 1977. The shares acquired by the partnership were brought into its books at a deemed cost (said to be market value) of $911,523 and sold, also on 30 June 1977, for $16,200, resulting in a claimed loss of $895,323. The elaborate procedure by which this result was achieved can be summarised as follows:
- (a) On 29 April 1977 the issued capital of Bayswater Furniture was $18,000 consisting of 9,000 unclassified shares of $2 each, owned by a Mr and Mrs Vassallo, who had no apparent connection with any person or company involved in this appeal. The balance sheet showed shareholders' funds of $859,395 represented by cash at bank of $1,071,503 less a provision for tax of $212,108.
- (b) By an agreement made on 29 April 1977, apparently at arm's length, Mr and Mrs Vassallo agreed to sell their shares for $1,011,614 to Lowanna Explorations Securities Pty. Ltd., a company controlled by Messrs Coghill and Gray, settlement to be made on the same day.
- (c) On 28 April 1977, apparently in anticipation of the settlement on the following day, Spir-l-ok (Overseas) Pty. Ltd., another company controlled by Messrs Coghill and Gray, had established a bank account in the name of Bayswater Furniture with a deposit of $10, and on 29 April 1977 the assets of Bayswater Furniture (cash of $1,071,503) were transferred to it, thence transferred on loan to Spir-l-ok. On the same day the same sum was lent on by Spir-l-ok to Lowanna, which paid $1,011,614 to Mr and Mrs Vassallo for their 9,000 shares.
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- (d) On 30 April 1977 Messrs Coghill and Sheedy, representing Lowanna as the holder of the issued shares in the capital of Bayswater Furniture, resolved that the action of the directors in paying a dividend of $122,000 be approved.
- (e) On 16 June 1977 Taclor purchased the 9,000 issued shares in the capital of Bayswater Furniture from Lowanna, paying $911,523 therefor and receiving a transfer. On 17 June 1977 Lowanna paid that sum on to Spir-l-ok in partial repayment of the latter's loan of $1,071,503 made on 29 April, and Spir-l-ok repaid Bayswater Furniture $1,071,503. The same sum was lent on 17 June by Bayswater Furniture to Panel and Paint Pty. Ltd. (a company in the management of which Mr Coghill was involved and whose cheques he could sign) which, apparently acting as a banker, lent $911,523 to Taclor.
- (f) On 24 June 1977 Taclor transferred the 9,000 ordinary shares in the capital of Bayswater Furniture to Mr Davidson as trustee for Tactown. On 28 June Taclor paid $100 to Bayswater Furniture in return for the allotment of 50 ``A'' class shares in its capital, an appropriate amendment to the latter's articles of association having been made the day before. All shares carried equal voting rights.
- (g) On 29 June 1977 Spir-l-ok deposited with or lent to Bayswater Furniture $122,000 and Bayswater Furniture paid the dividend of that amount to Lowanna which had been approved on 30 April; and Lowanna made a deposit or loan of the same amount to Spir-l-ok.
- (h) On 30 June 1977 Panel and Paint paid $931,503 to Bayswater Furniture in partial repayment of the loan of $1,071,503 made on 17 June, and Bayswater Furniture used that sum to pay Taclor a dividend of $931,503 upon the newly-issued ``A'' class shares, which sum Taclor paid to Panel and Paint in repayment of the loan of that sum made on 17 June.
- (i) On 30 June Tactown sold the 9,000 ordinary shares in the capital of Bayswater Furniture for $16,200 to Hasent Pty. Ltd., a company with which, according to Mr Coghill, arrangements had previously been made for the purpose.
The foregoing account shows that:
- (1) Of the $1,071,503 cash at bank of Bayswater Furniture on 29 April 1977 the vendor shareholders, Mr and Mrs Vassallo, received $1,011,614 from Lowanna, which derived it through Spir-l-ok from Bayswater Furniture. The ultimate destination of the remaining $59,889 does not appear from the evidence.
- (2) The 9,000 ordinary shares sold by Mr and Mrs Vassallo to Lowanna were transferred for $911,523 to Taclor and then to Tactown, and then sold to Hasent for $16,200.
- (3) The sum of $911,523 paid by Taclor to Lowanna for the 9,000 shares was passed to Spir-l-ok, then to Bayswater Furniture, to Panel and Paint and back to Taclor.
- (4) The dividend declared by Bayswater Furniture upon the ``A'' class shares held by Taclor was funded by Panel and Paint.
In summary, when the shares in Bayswater Furniture were bought by Lowanna they were the shares of a so-called ``cashed-up'' company; and its current-year profits were then eliminated by its being ``treated'', as it was said, so that no income tax was payable by virtue of sec. 47 of the Income Tax Assessment Act. The unclassified shares in the capital of Bayswater Furniture had apparently been bought by Taclor from Lowanna, transferred to Tactown at a cum dividend value in reliance on sec. 36 on the footing that Taclor was a share trader disposing of trading stock and, after a dividend-stripping operation in favour of Taclor, sold by Tactown at a loss, on the footing again that Tactown was a share trader disposing of trading stock.
(C) The dealings with the R.D. Collier Pty. Ltd. shares
The partnership deed provided that Taclor should contribute as capital to the partnership one $2 share in each of the classes ``A'', ``B'', ``C'', ``D'' and ``F'' in the capital of R.D. Collier Pty. Ltd., and be credited with $1.60 for each share. These shares were acquired by the Tactown partnership at a deemed cost (said to be market value) of $128,950 and sold on 30 June 1977 for $9, representing a claimed loss of $128,941. The procedure involved was as follows:
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- (a) On 30 May 1977 the issued capital of R.D. Collier Pty. Ltd. was $10, consisting of one $2 share of each of the classes ``A'', ``B'', ``C'', ``D'' and ``F'', owned by members of the Collier family - persons apparently unconnected with any person or company involved in this appeal. The balance sheet showed shareholders' funds of $79,595 represented by cash at bank of $134,324 less provision for tax of $54,729.
- (b) By an agreement made on 30 May 1977, apparently at arm's length, the holders of the shares agreed to sell them for $115,010 to Temagog Pty. Ltd., a company controlled by Messrs Coghill and Gray, settlement to be made on the same day.
- (c) On 25 May, apparently in anticipation of the settlement, Sadoff Pty. Ltd., another company controlled by Messrs Coghill and Gray, opened a bank account to be used by the purchaser in the name of R.D. Collier Pty. Ltd. and on 30 May the assets of R.D. Collier Pty. Ltd. (cash of $134,324) were transferred to it and paid out by way of loan to Sadoff. On the same day the same sum was lent on by Sadoff to Temagog, which paid $115,010 to the vendor shareholders for their shares.
- (d) On 15 June 1977 Taclor purchased the five issued shares in the capital of R.D. Collier Pty. Ltd. from Temagog for $25,790 each, paying Temagog $128,950 therefor and receiving a transfer. On the same day Temagog paid $134,324 to Sadoff in repayment of Sadoff's loan made on 25 May and Sadoff repaid R.D. Collier Pty. Ltd. the same amount. The same sum was lent by R.D. Collier Pty. Ltd. to Panel and Paint Pty. Ltd., which lent the same sum to Taclor.
- (e) On 24 June 1977 Taclor transferred the five shares in the capital of R.D. Collier Pty. Ltd. to Mr Davidson as trustee for Tactown. On 28 June Taclor paid $2 to R.D. Collier Pty. Ltd. in return for the allotment of one ``E'' class share in its capital an appropriate amendment to the latter's articles of association having been made the day before. All shares carried equal voting rights.
- (f) On 29 June Panel and Paint repaid to R.D. Collier Pty. Ltd. $134,314 and R.D. Collier Pty. Ltd. $134,314 and R.D. Collier Pty. Ltd. paid a dividend on the one ``E'' class share of the same amount to Taclor, which paid Panel and Paint the same amount in part repayment of its loan of $134,324 made on 15 June.
- (g) On 30 June 1977 Tactown sold the ``A'', ``B'', ``C'', ``D'' and ``F'' shares in the capital of R.D. Collier Pty. Ltd. to Hasent Pty. Ltd. for $1.80 each, a total of $9.
The foregoing account shows that:
- (1) Of the $134,324 cash at bank of R.D. Collier Pty. Ltd. on 30 May 1977, the vendor shareholders received $115,010 from Temagog, which derived it through Sadoff from R.D. Collier Pty. Ltd. The remaining $19,314 appears to have gone to Temagog as to $13,940 and to Taclor as to $5,374.
- (2) The five ``A'', ``B'', ``C'', ``D'' and ``F'' shares sold by the Collier family shareholders to Temagog were transferred for $128,950 to Taclor and then to Tactown, and sold to Hasent for $9.
- (3) The sum of $128,950 paid by Taclor to Temagog for the five shares was passed to Sadoff, then to R.D. Collier Pty. Ltd., to Panel and Paint and back to Taclor.
- (4) The dividend declared by R.D. Collier Pty. Ltd. upon the one ``E'' class share held by Taclor was funded by Panel and Paint.
The procedure was essentially the same as that adopted in relation to the acquisition and disposal by Taclor and Tactown of the Bayswater Furniture shares, and the above comments in relation to it are equally applicable here.
D Transactions with shares in the Norfolk Island companies, Spencer Ltd., Starke Ltd., Stroud Ltd. and Sykes Ltd.
The partnership deed provided that Taclor should contribute as capital to the partnership 100 ``B'' class shares of $1 each in the capital of each of Spencer Ltd., Starke Ltd., Stroud Ltd. and Sykes Ltd. These companies were conveniently referred to during the hearing of the appeal as the ``S'' companies. Taclor was to be credited with $80 for each parcel of 100 shares in the ``S'' companies and, if dividends amounting in all (between the four ``S'' companies) to $327,797 were not declared and paid by them, with a further amount of up to
ATC 4297
that sum: cl. 4(d) and Pt C of the second schedule. ``C'' class shares in the capital of each of the ``S'' companies were issued, eventually coming into Taclor's hands, and the dividends stipulated in the partnership deed were declared and paid. The 100 ``B'' class shares in the capital of each of the ``S'' companies acquired by the partnership on 24 June 1977 were brought into its books at a deemed cost (said to be market value) and sold on 30 June to produce claimed losses as follows: Deemed cost Sale price Claimed loss
$ $ $
Spencer Ltd. 35,000 90 34,910
Starke Ltd. 88,000 90 87,910
Stroud Ltd. 59,000 90 58,910
Sykes Ltd. 139,000 90 138,910
------- ---- --------
TOTAL 321,000 $360 $320,640
------- ---- --------
The claimed loss was the product of a labyrinthine scheme that depended on a body of interlocking companies and associated trusts established on Norfolk Island. The scheme was designed, in essence, to create a large capital profit reserve (or the appearance of it) in the ``S'' companies (among others) so that, after ``B'' class shares in their capital had been acquired by Taclor, the value of those shares could be much reduced, allowing for their subsequent sale by the partnership at a loss. The reality and therefore the efficacy of the scheme were impugned in various ways on behalf of the respondent. In order to make appropriate findings of fact I must unfortunately describe its development and operation in some little detail.
The scheme depended on the deployment of several companies on the mainland of Australia that were wholly or partly controlled or operated by Messrs Coghill and Gray, including Sadoff Pty. Ltd., Panel and Paint Pty. Ltd., Temagog Pty. Ltd., Lowanna Explorations Securities Pty. Ltd., Lewis and Halley Pty. Ltd., Awahli Investments Pty. Ltd. and Ocber Pty. Ltd., as well as Taclor. The scheme also depended on the co-operation of several Norfolk Island residents, including Mr W.J. Lackey, a chartered accountant, his wife Mrs B.L. Lackey, Mr J.T. Brown, a solicitor practising on the island, and Mr D.L.B Lusk, who formerly held a number of administrative appointments, including Registrar of the Supreme Court of Norfolk Island and Registrar of Companies and of Births, Deaths and Marriages on the island. It is to be noted that Norfolk Island imposed no gift duty and no stamp duty on transfers of shares, circumstances of which the scheme took advantage. Moreover, a transferee of shares was not required by the relevant Norfolk Island law to sign an instrument of transfer, so that the making of gifts of shares in the capital of companies incorporated on the island was somewhat facilitated. Nor did the relevant company legislation contain any equivalent of sec. 67 of the Companies Act 1961 of the State of Victoria, prohibiting certain kinds of financial assistance to be given by a company in the acquisition of shares in its own capital.
Most of the body of Norfolk Island trusts and companies involved in the scheme were established in the first half of 1977, but there were three others of longer standing - the Coghill Norfolk Island Trust, which was established in 1974, Sunlight Ltd., incorporated in 1975 and in which the Coghill Norfolk Island Trust held shares, and Westminster Corporation Ltd., the shares in which were held by Messrs Brown and Lackey and which acted as trustee for the Coghill Norfolk Island Trust and all the Norfolk Island trusts hereafter mentioned.
The intricate procedure as a result of which the Tactown partnership came to acquire and to dispose of shares in the ``S'' companies included the following steps:
- (a) On 25 February 1977 a company called Magnum Ltd. was incorporated on Norfolk Island with a nominal capital of $10,000 divided into 10,000 shares of $1 each, of which ten were allotted to Norfolk Island residents, including Messrs Brown and Lusk and Mr and Mrs Lackey. According to the
ATC 4298
evidence of Mr Edwards, Mr Lusk was the beneficial owner of all the shares. Mr Lusk and Mrs Lackey were appointed the directors. - (b) On 7 April 1977 the directors of Magnum resolved to apply for the allotment of five redeemable preference shares of $1 each in the capital of Lewis and Halley Pty. Ltd. and Temagog Pty. Ltd., and to purchase five redeemable preference shares in the capital of Lowanna. The consideration for each share in each case was $1 and the shares were duly acquired.
- (c) On 13 April 1977 there were established on Norfolk Island two discretionary trusts, of which Westminster Corporation became trustee, namely:
- (i) the Linlithgow Trust, settled substantially for the benefit of Mr Coghill and his family; and
- (ii) the Cloverdale Trust, settled substantially for the benefit of Mr Gray and his family.
- (d) On 15 April 1977 there were incorporated on Norfolk Island two companies, namely:
- (i) First Edition Ltd.;
- (ii) Bachelor Ltd.
The subscribing members of each of these companies were seven Norfolk Island residents, each of which took up one ``A'' class share.
- (e) On 18 April 1977 the directors of Magnum resolved that Magnum should apply for the allotment of 448,500 ``B'' class shares of $1 each in the capital of First Edition and of Bachelor for a consideration of $1 a share. The consideration to be paid for these allotments was provided by a loan of $897,000 on 15 April from Sadoff Pty. Ltd. to Magnum. The shares were allotted on 18 April 1977 and First Edition and Bachelor, having each received $448,500 from Magnum, lent it on to Sadoff.
- (f) On 19 April 1977 the directors of Magnum resolved to sell to Westminster Corporation its holdings of $448,500 shares in the capital of each of First Edition and Bachelor. The consideration was $451,000 for each parcel. This was payable by a cash deposit of $500 in each case, but the balance was expressed in the two relevant agreements to be satisfied if Lewis and Halley, Temagog and Lowanna (in the capital of each of which Magnum held five redeemable preference shares) declared dividends of $450,500 in favour of Magnum. Westminster paid the two deposits of $500 and on 21 April dividends were in fact declared by Lewis and Halley, Temagog and Lowanna amounting to $901,000 in all in favour of Magnum, which on the same day repaid $897,000 to Sadoff. Westminster Corporation had resolved to acquire the First Edition shares as trustee for Linlithgow Trust and the Bachelor shares as trustee for the Cloverdale Trust.
- [Pausing at this stage of the narrative, one may see that $897,000 passed on 15 April 1977 from Sadoff to Magnum, and on 18 April from Magnum to First Edition and Bachelor (equally) and on the same date from First Edition and Bachelor (between them) to Sadoff. On 21 April Lewis and Halley, Temagog and Lowanna paid $901,000 to Magnum which, on the same day, paid $897,000 to Sadoff.]
- (g) On 5 May 1977 there were incorporated on Norfolk Island 40 companies named as follows:
- 1. Apeco Ltd.
- 2. Benjafield Ltd.
- 3. Broberg Ltd.
- 4. Buck Ltd.
- 5. Chalker Ltd.
- 6. Charles Wegg Ltd.
- 7. Charlie Brown Ltd.
- 8. Cranswick Ltd.
- 9. Devitt Ltd.
- 10. Fleming Ltd.
- 11. Fortescue Ltd.
- 12. Fundamental Ltd.
- 13. Glenrowan Ltd.
- 14. Gower Ltd.
- 15. Grimes Ltd.
- 16. Harvey Holdings Ltd.
- 17. Hermes Ltd.
- 18. Joe Cool Ltd.
- 19. Manilla Ltd.
- 20. Navigation Ltd.
- 21. Ned Kelly Ltd.
- 22. Parr Ltd.
- 23. Playbox Ltd.
- 24. Plucknett Ltd.
ATC 4299
- 25. Prosser Ltd.
- 26. Rath Ltd.
- 27. Revenue Ltd.
- 28. Ritchie Ltd.
- 29. Spencer Ltd.
- 30. Starke Ltd.
- 31. Stenhouse Ltd.
- 32. Stonham Ltd.
- 33. Stroud Ltd.
- 34. Sykes Ltd.
- 35. Toose Ltd.
- 36. Troy Ltd.
- 37. Watson Ltd.
- 38. Windsor Ltd.
- 39. Woodman Ltd.
- 40. Yorston Ltd.
It will be seen that the so-called ``S'' companies were respectively numbered 29, 30, 33 and 34. Each of the 40 companies had a nominal capital of $10,000 consisting of 10,000 shares of $1 each divided into 1,000 class ``A'' shares, 8,000 class ``B'' shares and 1,000 class ``C'' shares. The seven subscribers to each company (all Norfolk Island residents) took up 1 ``A'' class share each.
- (h) Also on 5 May 1977 there was established on Norfolk Island another discretionary trust called the Hillcrest Trust, the general beneficiaries of which included Mr Coghill and the 40 companies referred to above and Sunlight Ltd. The trustee was Westminster Corporation. On the same day each of the above-mentioned 40 companies, upon the application of Westminster Corporation, respectively allotted 13 of their ``B'' class shares for a consideration of $1 per share to Westminster Corporation as trustee for the beneficiaries of the Hillcrest Trust.
- (i) On 10 May 1977 there were established on Norfolk Island two further discretionary trusts namely:
- - Burnt Pine Trust, of which the general beneficiaries included Mr Coghill (the appointor) and Yorston Ltd. (the last of the 40 companies); and
- - Kingston Trust, of which the general beneficiaries included Mr Gray (the appointor) and Yorston.
Westminster Corporation was trustee of each trust.
- (j) Following the establishment of the Burnt Pine Trust and the Kingston Trust, the 40 companies and Sunlight Ltd. were on 10 May constituted into a ``chain'', of which Sunlight was the first ``link''. This was achieved by a transfer by Westminster Corporation, as trustee of the Hillcrest Trust, of all the 13 issued ``B'' class shares in Apeco Ltd. to Sunlight Ltd., all of the 13 issued ``B'' class shares in Benjafield Ltd. to Apeco Ltd., all of the 13 issued ``B'' class shares in Broberg Ltd. to Benjafield Ltd., and so on until all of the 13 issued ``B'' class shares in Yorston Ltd. were transferred to Woodman Ltd. That is to say, each company in the chain (beginning with Sunlight and ending with Woodman) held 13 ``B'' class shares in the company below it. Yorston held no shares. It was, however, a beneficiary of both the Burnt Pine Trust and the Kingston Trust; and the shares in Sunlight were held by the Coghill Norfolk Island Trust. The ``A'' class shares in the capital of each of the 40 companies were apparently similarly dealt with, but the exact time and manner of this was left unclear by the evidence.
- (k) On 10 May 1977 Westminster Corporation made a distribution in specie by way of gift:
- (i) as trustee of the Linlithgow Trust to the Burnt Pine Trust of 448,500 shares in the capital of First Edition; and
- (ii) as trustee of the Cloverdale Trust to Kingston Trust of 448,500 shares in the capital of Bachelor.
- (1) On 12 May 1977 Westminster Corporation made a distribution in specie by way of gift:
- (i) as trustee (and with the written consent of the appointor) of the Burnt Pine Trust to Yorston, a beneficiary of that trust, of 448,500 shares in the capital of First Edition; and
- (ii) as trustee (and with the written consent of the appointor) of the Cloverdale Trust to Yorston, a beneficiary of that trust, of 448,500 shares in the capital of Bachelor.
[Pausing again in the narrative, it will be seen that Yorston Ltd. at this stage held all the ``B'' shares in the capital of First
ATC 4300
Edition and Bachelor, each of which had (in theory at least) a capital profit of $448,500 - a total of $897,000; and that Woodman held all the ``B'' shares in the capital of Yorston, Windsor held all the ``B'' shares in the capital of Woodman and so on up the chain to Sunlight Ltd., which held all the ``B'' shares in the capital of Apeco Ltd.] - (m) On 18 May 1977 First Edition and Bachelor each lent $448,500 to Chase Manhattan Ltd. (not connected with the well-known international organization of a similar name), which lent those sums on to Avocado Marketing Ltd. Both last-mentioned companies were incorporated on Norfolk Island and controlled by Mr Lusk, or by him and his associates on Norfolk Island. On the same day Yorston sold to Avocado for $896,000 the shares it then held in the capital of First Edition and Bachelor, and Yorston received a cheque for $896,000, which sum it lent on to Sadoff. Yorston therefore had (in theory) a capital profit of $896,000.
- (n) Woodman, as the holder of the shares in the capital of Yorston, was treated by the trustee as having an asset of $886,000. The disposition of shares in the capital of the companies up the chain from Woodman to Troy was not the subject of evidence, except that each company sold the shares it held in the one next below it. Each of the next ten companies up the chain, from Toose Ltd, to Rath Ltd. (inclusive) sold to Awahli Investments Pty. Ltd. the shares it held in the company immediately below it. The consideration for the sale by Sykes Ltd. of the shares it held in the capital of Toose Ltd. was $845,007; and the consideration reduced by $1,000 for each succeeding sale up the chain so far as the sale by Prosser Ltd. The table set out below assists in an understanding of the sales made, and columns 1, 2 and 3 reveal that the total purchase price due to be paid by Awahli Investments was $8,405,070. The exercise proceeded as though each vendor company had received the purchase price as a capital profit before the shares in its capital were sold. The disposition of the ``A'' class shares in the capital of the companies in the chain is not very clear on the evidence. It seems, however, that they were ultimately transferred, together with the ``B'' class shares, at their nominal value.
TABLE
(1) (2) (3) (4) (5) (6) (7)
Sale to Awahli
Dividends
Investments Pty. Allotment of Dividends Allotment of
Ltd. of 7 ``A'' shares to paid on shares to Paid on
and 13 ``B'' Class Sale price Jensen Ltd. 3/6/77 Taclor on 30/6/77
shares in: Vendor $ on 2/6/77 $ 17/6/77 $
Rath Ltd. Prosser Ltd. 836,007 1 ``C'' 836,850
Revenue Ltd. Rath Ltd. 837,007 1 ``C'' 637,500 87 ``B'' 200,500
Ritchie Ltd. Revenue Ltd. 838,007 1 ``C'' 838,950
SPENCER LTD. Ritchie Ltd. 839,007 1 ``C'' 803,100 87 ``B'' 36,900
STARKE LTD. Spencer Ltd. 840,007 1 ``C'' 751,000 87 ``B'' 90,000
Stenhouse
Ltd. Starke Ltd. 841,007 1 ``C'' 841,000
Stonham
Ltd. Stenhouse Ltd. 842,007 1 ``C'' 732,000 87 ``B'' 111,000
STROUD LTD. Stonham Ltd. 843,007 1 ``C'' 783,500 87 ``B'' 60,500
SYKES LTD. Stroud Ltd. 844,007 1 ``C'' 704,603 87 ``B'' 140,397
Toose Ltd. Sykes Ltd. 845,007 1 ``C'' 845,900
---------- ---------- --------
$8,405,070 $7,775,303 $639,297
---------- ---------- --------
- (o) The funding of the purchase by Awahli of the shares in the ten companies was achieved in this way:
- (i) on 30 May 1977:
- - Panel and Paint lent $7,770,000 to Taclor, which applied for and was
ATC 4301
allotted and purported to pay Awahli for 777 shares of $1 each in the capital of Awahli at a premium of $9,999 per share; and - - Awahli purported to lend $7,770,000 to Panel and Paint;
- - Panel and Paint lent $7,770,000 to Taclor, which applied for and was
- (ii) on 31 May 1977 Panel and Paint repaid Awahli the loan of $7,770,000 and lent a further $635,000 to Awahli - a total of $8,405,000 which Awahli paid to the ten vendors of the shares to it. There were cheques that changed hands and there were entries in the records of the ``S'' companies which showed that Awahli paid Spencer Ltd. $840,007, Starke Ltd. $841,007, Stroud Ltd. $844,007 and Sykes Ltd. $845,007: see column 3 of the above table.
- (iii) the ten vendors (Sykes Ltd. up the chain to Prosser Ltd.) together deposited the proceeds of sales of the ``B'' shares ($8,405,000) with Panel and Paint;
- (iv)(1) on 31 May 1977 Awahli acquired by allotment for a consideration of $1 each 7 ``A'' class shares in the capital of Jensen Ltd., of which Messrs Coghill and Sheedy were directors;
- (2) on 2 June 1977 Jensen Ltd. was allotted 1 ``C'' class share in each of the ten vendor companies (including the four ``S'' companies) for a consideration of $1 each;
- (3) on the same day Panel and Paint lent $7,775,303 to the ten vendor companies, including $803,100 to Spencer Ltd., $751,000 to Starke Ltd., $783,500 to Stroud Ltd. and $704,603 to Sykes Ltd.;
- (4) the ten vendor companies paid dividends of $7,775,303 to Jensen Ltd. as the ``C'' class shareholder, as appears in column 5 of the above table;
- (5) Jensen deposited the amount of the dividends ($7,775,303) with Panel and Paint.
- (i) on 30 May 1977:
- (p) On 6 June 1977 Taclor borrowed $636,969 from Panel and Paint and paid that sum to Awahli for the purchase of 7 ``A'' and 13 ``B'' class shares in six Norfolk Island companies, including the ``S'' companies. Awahli deposited that sum with Panel and Paint, thus repaying the loan of $635,000 obtained from Panel and Paint on 31 May.
- (q) On 17 June 1977 Taclor obtained by allotment for a consideration of $1 per share 87 shares in each of six Norfolk Island companies, including the ``S'' companies, involving a payment of $522 in all: see column 6 of the above table. Taclor now held 7 ``A'' and 100 ``B'' shares in each of the ``S'' companies, and the ``B'' shares were transferred to Tactown on 24 June in accordance with the partnership deed.
- (r) On 29 June Panel and Paint funded a purchase by Ocber Pty. Ltd. from Taclor for $7,770,000 of the 777 shares in Awahli that had been allotted to Taclor on 31 May, thus allowing repayment by Taclor of an equal sum that Panel and Paint had initially provided for their acquisition by Taclor. Also on 29 June Panel and Paint lent a further sum of $8,150,000 to Ocber, which was paid by Ocber to Taclor for the allotment to Ocber of 815 $1 shares in the capital of Taclor for a premium of $9,999 per share; and the proceeds were paid on the same day by Taclor to Panel and Paint in extinguishment or reduction of existing indebtedness.
- (s) On 30 June the ``S'' companies paid to Taclor or Jensen dividends on the ``C'' class shares in their capital in the sums contemplated by the Tactown partnership deed (see column 7 of the above table), loans of the required amounts having been made to them on that day by Panel and Paint and subsequently repaid or refunded to Panel and Paint by Jensen. On the same day the 100 ``B'' class shares in each of the ``S'' companies that had been brought into Tactown's books at a total value of $321,000 were sold to Avocado for $360 ($90 per parcel), producing a loss of $320,640.
(E) Miscellaneous share transactions
20 shares in the capital of Walker Heating Pty. Ltd. were acquired by Tactown on 27 June 1977 for $1,128,007 from Twin Hulls Ltd., a Norfolk Island company, and disposed of on 28 June 1977 for $1,128,507 to Temagog, resulting in an apparent profit of $500. The purchase by Tactown was apparently financed
ATC 4302
by a loan from Panel and Paint of $1,128,500. On its face the transaction appears to have infringed the provisions of cl. 11(e)(2) of the partnership deed; and no justification for or clear explanation of it was offered in evidence.These are all the primary findings of fact that I think I need to make upon the large volume of evidence presented. I have done no more than summarise what appear to be the salient facts up to 30 June 1977 that were said to bear on the proper commercial status of the Tactown partnership. I have risen from a long consideration of the whole of the evidence with two overwhelming impressions. First, there was an obvious and meticulous preparation for the execution of a so-called tax minimisation scheme on a prodigious scale: the ramifications clearly extended far beyond the Tactown partnership. Secondly, many of the transactions had an almost ineffable artificiality about them which must influence an assessment of their commercial quality and effect.
I was invited on behalf of the appellant to consider, in addition to the transactions I have summarised, the avowed objects of the Tactown partnership, as expressed and implied in the partnership deed, and the transactions of the partnership after 30 June 1977. Counsel for the appellant pointed especially to the fact that some publicly-listed shares acquired by the partnership before 30 June 1977 at a cost of some $5,031 were retained after that date, treated as stock on hand and used thereafter, apparently for purposes of trade. In the year ended 30 June 1978 there was substantial buying and selling of shares on the stock exchange and there was an overall net profit of $20,095. Only $131 of this derived, however, from share trading, the remainder coming from interest from the unsecured loan to Pyramul Pty. Ltd. In the year ended 30 June 1979 the partnership made a profit from share transactions of $678 upon a turnover of $41,000. That the benefit from share trading in the years subsequent to 1977 was not large is not of itself by any means decisive:
Thomas v. F.C. of T. 72 ATC 4094 at pp. 4099-4100; (1972) 46 A.L.J.R. 397 at p. 401. I was urged, therefore, not to regard the partnership's share transactions to 30 June 1977 in isolation and to consider not only the subsequent transactions to which I have referred, but also the shares retained after that date which were said to have been treated as trading stock. It was also submitted for the appellant that dealings in the shares contributed to the partnership by Taclor involved share trading because those shares were regarded by the partnership deed as trading stock. I have taken these matters into account. The significance of the terms of the partnership deed and of the partnership's share dealings after 30 June 1977 must obviously, however, be related to and derive colour from the bulk of its share transactions from 24 to 30 June 1977 when one is characterising its activities during that period. In the result, I consider that the objects of the partnership to be derived from the deed and the total dealings in listed company shares after 30 June 1977, so far as the evidence refers to them have very little influence on the question.
One is, after all, concerned with a claimed share trading loss for taxation purposes of some $1.34 million incurred in a period of a week, which loss is said to be attributable to the carrying on of a business of trading in shares. The essential contributions to that result were sales of shares in Bayswater Furniture Pty. Ltd. for $16,200, R.D. Collier Pty. Ltd. for $9 and the ``S'' companies for $360, all of which shares had been acquired on 24 June and sold on 30 June 1977. In my opinion the activities of the partnership during that period are not, upon any fair view of them, property to be regarded as having had the quality of trade at all. This is my conclusion, even when one regards them in the light of the partnership deed and the partnership's conduct after 30 June 1977.
The enterprise of the partnership's promoters, Messrs Coghill and Gray, was avowedly that of tax minimisation. There was careful planning by Mr Coghill and others designed to produce a partnership loss in the 1977 year of $1,342,105, which goal was apparently achieved and indeed slightly exceeded. I would infer that the efforts of the partnership management were directed towards that end and no other. The provision of the loss was a service offered for a fee by the promoters to members of the partnership, apart from Taclor, as their clients. As his accountant, Mr Jacobs, indicated, the appellant entered the partnership with a view to achieving a deductible loss for taxation purposes. I would further infer that he did so for no other commercial purpose and that the other members were similarly motivated. In particular, I would infer that no partner had any expectation of
ATC 4303
profitable share trading by the partnership and that the achievement of profit would in fact have been contrary to the partners' desires and interests. Mr Sinclair, and to some extent Mr Coghill, asseverated otherwise, albeit in a somewhat vague and temporizing fashion. I regret that I must reject their evidence in that behalf. I draw the inferences, to which I have referred, in the light of all the circumstances of the partnership's conception, birth and baptism as a commercial entity. I am encouraged in drawing them by the absence as witnesses of a number of persons who could, I have no doubt, have thrown light on the true nature of the partnership and the character of its activities. Among these absentees were the appellant himself and indeed any other member of the partnership, Mr G.L. Gray (a promoter of the partnership and one who was centrally involved in the tax minimisation scheme), Mr Davidson, a solicitor and the trustee of the partnership's property, Mr Sheedy and Mr Colquhoun, the stockbroker. In accordance with accepted principle, exemplified in such authorities asJones v. Dunkel (1958-1959) 101 C.L.R. 298 and
O'Donnell v. Reichard (1975) V.R. 916, especially at p. 929, I am entitled to infer, as I do, that these persons, whose absence was not accounted for, could not have assisted the appellant's case upon the crucial matter of the essential nature of the partnership's business. Moreover, following the same authorities, I take that inference into account against the appellant in evaluating the mass of evidence bearing on that crucial matter and in drawing inferences from it in relation to that matter.
I infer that the stock exchange transactions engaged in by the partnership from 24 to 30 June 1977 (presumably nominally by Mr Davidson and with or without the assistance of Mr Colquhoun) were designed to give verisimilitude to an otherwise unconvincing attempt to display share trading activity. There was also evidence that Mr Coghill (or Mr Edwards on his behalf) had contended, in correspondence with the respondent, that all shares acquired by the partnership in the 1977 year of income were acquired with the intention that they be resold at a profit and that the consideration for shares not publicly listed had been negotiated at arm's length in a series of ordinary commercial transactions at market value. The evidence as a whole flies in the face of these statements. The fact that the statements were made, taken with the other circumstances to which I have referred, strongly supports the inferences I draw.
The provisions of cl. 4(d) of the partnership deed were much relied on for the respondent to demonstrate the essential artificiality of the partnership's capital structure. They were also said to point to the pre-ordained results of the execution of the deed, inconsistent with any idea of conventional commercial trading in the shares therein referred to. I agree that cl. 4(d) provides a basis for non-specific criticism of that kind. In association with it, I think, there is demonstrated a weakness of the foundation on which lay the whole of the basis for the partnership. The partnership depended for its efficacy upon its being what Mr Coghill called ``a s. 36A trading partnership''. By the expression ``a s. 36A trading partnership'' was meant, as I understand it, a partnership which, by force of sec. 36A and 36 and the surrounding circumstances, was deemed to have purchased at market value the shares that it acquired upon its formation. The truth is, however, that the partnership could only be one to which sec. 36A applied if it were properly to be regarded, irrespective of sec. 36, as carrying on the business of share trading in the 1977 financial year, the shares it acquired and disposed of being trading stock. That is to say, no deemed purchase at a price equal to market value decreed by sec. 36 could be taken into account in a determination of the question whether the partnership carried on the business of a share trader. Actually, neither the partnership nor the partners as such purchased any shares in the 1977 year except the comparative handful of publicly-listed shares I have specified, most of which were immediately sold, always at a loss. The shares in Bayswater Furniture, R.D. Collier and the ``S'' companies were in no sense purchased by the partnership in fact. The circumstances of their acquisition from Taclor as a contribution of capital and their sales seven days later to Hasent and Avocado Marketing reveal, in my view, not the operations of a share trader so much as those of an enterprise designed to give the appearance of a share trader with the assistance of sec. 36A and 36. Just as I regard the stock exchange transactions as dealings designed to give an appearance of a turnover, and not indicative of a business of trading in shares, I consider that the partnership's
ATC 4304
transactions involving shares not publicly listed involve no element of trading and that those shares should not be regarded as the partnership's trading stock. The provision found in cl. 5 of the partnership deed that ``the assets contributed to the partnership by Taclor shall be trading stock of the partnership and the partnership shall deal with the same accordingly'' is neutral. It cannot be of more assistance than the partnership's own boot straps in elevating to the status of a trader in shares: cf.J. and R. O'Kane & Co. v. I.R. Commrs 12 T.C. 303 at p. 347, where Lord Buckmaster said, in a passage that is apposite here, ``... the intention of a man cannot be considered as determining what it is that his acts amount to; and the real thing that has to be decided here is what were the acts that were done in connection with this business and whether they amount to a trading which would cause the profits that accrued to be profits arising from a trade or business''. A trader in shares ordinarily carries on the business of acquiring and disposing of shares with a view to obtaining a financial advantage; but it does not follow that one who acquires and disposes of shares with a view to achieving a financial advantage is necessarily a trader in shares. Certainly, shares bought and sold by a share trader may be classified as part of his trading stock even though they were acquired for the purpose of deriving a fiscal advantage from or following a dividend-stripping operation:
Investment & Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249. Reliance was placed for the appellant on a now-celebrated dictum of Walsh J. in that case, endorsed as it has been by
F.C. of T. v. Patcorp Investments Ltd. (1973-1976) 140 C.L.R. 247 and F.C. of T. v. Westraders Pty. Limited 80 ATC 4357; (1979-1980) 144 C.L.R. 55. His Honour said at ATC p. 4150; C.L.R. pp. 270-271:
``I do not assert, of course, that shares are always trading stock in the hands of their owner; and even where the owner is a dealer in shares the circumstances may show that particular shares are not trading stock. 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 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.''
This, however, is no authority for a conclusion that shares acquired for the purpose of disposal after the conduct of a dividend-stripping operation which produces a fiscal advantage are necessarily to be regarded as having been acquired in the course of an operation of share trading.
The advantage sought to be derived by the Tactown partnership from the acquisition and disposal of shares was one that did not involve share trading, however much the promoters or the partners might have hoped or desired or intended that it should. The benefit from the acquisition and disposal of the non-listed shares depended on their being deemed to have been purchased when the companies that had issued them were pregnant with real or manufactured profits and their disposal after those profits had been depleted in favour of Taclor or on its behalf. The dealings in those shares by Tactown were engaged in, so far as I can see, only in order that the shares might, upon their acquisition, be deemed to have been purchased by the partnership at the value which sec. 36 ascribed to them and, upon their disposal, be seen to have realized a much smaller sum. However these dealings might be characterized they were not, in my opinion, dealings of a trader in shares.
There was foreshadowed on behalf of the respondent an argument that the whole of the arrangement as to the acquisition of shares by Tactown from Taclor Pty. Ltd., and the whole of the arrangement as to the creation of capital profit reserves were and are ``fiscally null''. In the event, counsel for the respondent did not argue that any so-called concept of fiscal nullity was capable of application, conceding that the decision of the Federal Court in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 at pp. 4724-4726 precluded it. Counsel desired, however, to reserve the argument for another place if necessary; and he invited me to make findings of fact along the lines of the facts isolated by Lord Wilberforce and numbered 1-6 in his speech in
W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300 at p. 328. Without
ATC 4305
listing them in the way in which his Lordship did, I believe I will be found in the course of these reasons to have covered such facts, if any, disclosed by the evidence as enable the application of a so-called doctrine of fiscal nullity in this case to be investigated. I go no further than that.Counsel for the respondent pressed further arguments to the effect that many of the transactions involving Norfolk Island dealings that I have described were shams. He also argued specifically that, shams or not, certain of the transactions which comprised or led to the results contended for on behalf of the taxpayer involved arrangements that were struck down as against the respondent by virtue of sec. 260.
The following additional subsidiary findings of fact do, in my opinion, show that some of the transactions to which they relate were designed to create an appearance of affairs that do not exist. The transactions can be described metaphorically as providing disguises, facades or false fronts. It might therefore be possible to describe them as ``shams'' if one wants to use what Diplock L.J. in
Snook v. London & West Riding Investments Ltd. (1967) 2 Q.B. 786 at p. 802 called ``this popular and pejorative word''. I refer to these transactions for present purposes, however, not so much for what they might be labelled, nor even primarily for their bearing on the possible application of sec. 260, but in further support of my primary finding in the case: that the Tactown partnership did not carry on the business of a trader in shares during the 1977 financial year.
Mr Edwards travelled to Norfolk Island in April 1977 and assumed oversight, with direct responsibility to Mr Coghill, of the activities on the Island which the tax minimisation business of Mr Coghill and Mr Gray required during the remainder of the 1977 financial year. I am well satisfied that one of his purposes was to procure the establishment of a framework of companies that gave the appearance, when judged by the documentation that was prepared in relation to them, of a huge reservoir of capital profit reserves, whereas in fact there were either no such capital profit reserves or very much smaller reserves than was made to appear. Mr Edwards conceded in cross-examination, and it was obvious, that the device of a chain of companies, such as the chain of the 40 that were incorporated on 5 May 1977, could be used to ``create'' limitless capital, profit reserves. As appears from the facts I have found, what was involved after the ``chain'' effect was achieved was a real or apparent gift to the ultimate company in the chain, and the sale by the penultimate company of the shares in the capital of the ultimate company; and then the sale by the third-last company of the shares held by it in the capital of the penultimate company, and so on. Appropriate directors' resolutions, instruments of transfer, share scrip, share registers, cheques and books of account were prepared at each stage or at some convenient time afterwards. Depending on the length of the ``chain'', and the amount of the gift to the lowest company in it and the size of the discount allowed on each sale, there was, as Mr Edwards put it, ``no limit'' to the capital profit reserves that could be created. In fact, the companies in the chain of 40 were made to generate apparent capital profit reserves of some $33.4 million. As appears above, a total of $8,405,000 of this amount was generated by the ten companies going upwards from and including Toose Ltd. to and including Rath Ltd. The four ``S'' companies generated between them $3,366,000, which was relied on as providing the market value of a total of $321,000 for 100 ``B'' class shares in each of the four ``S'' companies that was sought to be attributed as a market value of Tactown's trading stock when those shares ultimately came to the partnership from Taclor.
I have, for ease of description during the course of the narrative, referred to ``gifts'', ``sales'', ``payments'', ``loans'', ``advances'', ``repayments'' and the like, but an examination of the facts shows these terms to be rather loosely or euphemistically employed. It is true that the voluminous records in evidence do show that there were resolutions passed, shares allotted and transferred, cheques issued and books of account kept, and so on. Great trouble was taken to complete documents on the Island and on the mainland which do, if considered in isolation company by company, give the appearance that they were evidently intended to give.
All the companies that were involved in the scheme were real enough and so, I am prepared to assume, were the various trusts. I am going to assume, further, that the distributions made by Westminster Corporation as trustee were in accordance with the terms of the relevant trust
ATC 4306
deeds: I do not find it necessary to investigate the earnest arguments for the respondent that some of them were not. A finding, however, that the several entities engaged in an obfuscating series of recorded transactions does not support a conclusion that, at the end, the Tactown partnership's acquisition and disposal of shares in the four ``S'' companies involved share trading, or that the shares in the ``S'' companies were the partnership's trading stock.Central to the scheme was a requirement that some Norfolk Island companies controlled by Mr Lusk, or by him and other Norfolk Island residents associated with him, would perform services for Messrs Coghill and Gray for reward. These companies were, notably, Westminster Corporation Ltd., Magnum Ltd., Chase Manhattan Ltd. and Avocado Marketing Ltd. Those companies entered into a series of more or less critical transactions with companies or trusts established by or on behalf of Messrs Coghill and Gray not, in general, as arm's length commercial transactions dependent upon a contractual relationship between the parties to them. Rather, the transactions were in general entered into pursuant to undisclosed but obvious side arrangements, and by way of providing a service for a fee, made between Messrs Coghill and Gray and Mr Lusk and others, often with Mr Edwards as intermediary.
It was pursuant to arrangements of this kind that Sadoff Pty. Ltd. on 15 April 1977 provided the funds of $897,000, or the appearance of them, to Magnum Ltd. to finance the acquisition by allotment of shares in First Edition and Bachelor and then, having received half of that sum on loan from each of First Edition and Bachelor, funded also the dividends declared by Lowanna Pty. Ltd., Temagog Pty. Ltd. and Lewis and Halley Pty. Ltd. by which, on 21 April, all but $1,000 of the purchase price of $901,000 for the First Edition and Bachelor shares was met by the Linlithgow and Cloverdale Trusts. Magnum then repaid $897,000 to Sadoff, therefore receiving in effect a fee of between $3,000 and $4,000, depending on the expenses it had incurred. By 12 May when Yorston received distributions in specie by way of gift from the Burnt Pine and Kingston Trusts, its assets would appear to have consisted of shares in First Edition and Bachelor. By 18 May, following the intervention of Avocado Marketing Ltd. and its banker, Chase Manhattan, and following the stripping of First Edition and Bachelor, Yorston's asset was a debt of $896,000 from Sadoff, and it was this sum that was treated as a capital profit in Yorston's hands. It was one of the respondent's criticisms of the scheme that little ``real money'' changed hands in the course of the establishment of the capital profit reserve in Yorston, except in favour of Magnum, in essence, the exercise was begun by the loan on 15 April of $897,000 by Sadoff and ended with the loan on 18 May of $896,000 to Sadoff by Yorston. The difference of $1,000 seems to have gone to Magnum, presumably as part of its fees or expenses. There was no evidence of the receivability of the debt owed to Yorston, but that was not regarded as essential to the working of the scheme involving the chain of companies. The shares in the capital of Yorston were treated as having a price not essentially because of the recoverability of Yorston's asset, but because of the way in which a liquidator might deal with the company upon a winding-up. Thus, according to Mr Edwards:
``It... would depend entirely on the way the liquidation was conducted or the realisation of the assets... Those companies were all saleable for premiums over their net tangible assets, and some, in fact were... sold for premiums over the shareholders' funds.''
There was no direct evidence of the ultimate fate of all 40 companies in the Apeco-Yorston chain, but Mr Edwards conceded in effect that they would be of no use, and might as well be wound up, after their so-called capital profit reserves had been dealt with in accordance with the scheme. [I should indicate, by the way, that the scheme overall involved five other partnerships similar to Tactown (namely, Tacville, Tacaide, Tacpart, Tacbourne and Tacper), of which Taclor was the ``vehicle''; and that the total tax losses intended to be created by Taclor for the 1977 financial year were in excess of $9 million. The tax minimisation business of Messrs Coghill and Gray also involved the use of four other companies as ``vehicles'' for so-called sec. 36A trading partnerships, and the total generation of tax losses envisaged for the 1977 financial year amounted to over $35.5 million.]
There was evidence that Yorston was wound up voluntarily not long after 30 June 1977 and that the shares in Woodman Ltd. (the
ATC 4307
penultimate company in the chain of 40) were sold on that date, going in various stages to Hasent Pty. Ltd. This sale was said to be indicative of the market for shares in the companies forming the 40-company chain, and therefore to demonstrate the market for the shares in the ``S'' companies that were ultimately sold by Tactown. There was also evidence (very bare) of the sale of shares in the capital of another company in another chain, similar in constitution and purpose to the chain of 40, which was said to demonstrate a comparable market. I feel unable to conclude, however, that these sales indicated a genuine market for the Woodman shares or those in the capital of the ``S'' companies after they had come into the hands of Tactown. I am left with the overall impression that the market for shares in the ``S'' companies sold by Tactown was a contrived one, perhaps dependent - as were most of the transactions involving the non-listed shares with which Tactown dealt in the 1977 fiscal year - upon funding by round robin dealings. I am left unpersuaded by the evidence that the capital profit reserves that were said to have arisen in the ``S'' companies were of any substantial worth. More particularly, I am unpersuaded that those persons who were involved in the Coghill-Gray tax minimisation business, and who were responsible for the Tactown partnership's dealings with shares in the Norfolk Island companies, understood that those dealings should take effect and operate according to their tenor as dealings by a share trading partnership with its trading stock. It will be recalled that the three individuals who were in charge of the affairs of Tactown were Messrs Davidson, Sinclair and Coghill. The first gave no evidence and the other two, who did, threw no useful light on the partnership's dealings with Norfolk Island shares. Mr Sinclair, I feel bound to conclude, was no more than a cypher who passively assented to what was put up to him by Mr Coghill's staff, particularly Mr Sheedy. Mr Coghill himself confessed to no real appreciation of the workings of the partnership's transactions in the Norfolk Island shares. The chain of companies, as he said, was the brainchild of Mr Edwards. Mr Coghill was evidently satisfied that the partnership should proceed to do what it did on the assumption that what was done would create a tax loss by virtue of the decision in the Westraders Pty. Ltd. case, supra. The decision in that case depended, however, on a finding that the partnership, Jenspart Trading Co., was a share trader and that the shares transferred to it were sold as part of its share trading activities: see 80 ATC at p. 4366; 144 C.L.R. at p. 73. The present case is in my opinion conspicuously different. What was done by Mr Coghill, and for that matter by Mr Edwards, was very largely mechanistic. Neither of them, and no other witness, really explained what was supposed to have made the Tactown partnership any more than a ``s. 36A trading partnership'' in name only.The conclusions I have so far expressed, if correct, inevitably mean that neither sec. 36A nor 36 applied to Tactown and that the appeal must fail. As I have indicated, counsel for the respondent contended further and separately that sec. 260 of the Act applied to avoid as against the respondent certain of the arrangements that were inherent in the scheme because their plain purpose and effect was to avoid tax. Specifically, the arrangements that were said to be struck down by sec. 260 were described as follows on behalf of the respondent:
- (a) the arrangements whereby:
- (i) Tactown was formed, and contributions to its capital were almost completely funded by Pyramul Pty. Ltd., and an amount equal to the amount so funded was lent back to Pyramul; and
- (ii) Tactown agreed to acquire the shares from Taclor Pty. Ltd. on the terms and conditions of cl. 4(d) and 9(a) of the partnership deed; and
- (iii) Tactown allowed the declaration and payment of dividends by Bayswater Furniture Pty. Ltd., R.D. Collier Pty. Ltd. and the four ``S'' companies otherwise than in favour of Tactown -
with the result that the value of the shares acquired by Tactown was reduced; and
- (b) the arrangement whereby a capital profit reserve of over $33 million was purportedly created in and by the chain of 40 Norfolk Island companies, and whereby the four ``S'' companies sold shares in the capital of other companies in the chain at a purported capital profit, which was then deposited by way of unsecured loans with associated companies.
ATC 4308
I deal briefly with this contention, so far as I can, on the footing that I am wrong to conclude that Tactown was not carrying on the business of a trader in shares. The essential answer offered on behalf of the appellant was that the impugned arrangements were designed to do, and did, no more than take advantage of an opportunity to avoid tax which the Act provides by specific provisions, notably sec. 36A, 36, 28, 29 and 51. The argument was that sec. 260, properly interpreted, cannot negate the application of these provisions and deny a benefit arising from an exercise which was made of a choice offered by the Act itself. The argument naturally relied on the well-known line of authority proceeding from
W.P. Keighery Pty. Ltd. v. F.C. of T. (1956-1957) 100 C.L.R. 66 through
Casuarina Pty. Ltd. v. F.C. of T. 70 ATC 4069; 71 ATC 4068; (1970-1971) 127 C.L.R. 62,
Mullens & Ors v. F.C. of T. 76 ATC 4288; (1975-1976) 135 C.L.R. 90,
Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1976-1977) 140 C.L.R. 314 and
Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330. Especial reliance was placed on the statement by Mason J. in the last of these, at ATC p. 4542; C.L.R. p. 339, which confirmed that the relevant principle:
``... is not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by sec. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage.''
Unquestionably, if sec. 36A and 36 were properly applicable so that Tactown were deemed to have purchased the non-listed shares at a price equal to market value, and if sec. 28 and 51 were to apply in the circumstances to permit the claimed deduction, sec. 260 could not thwart them.
I have assumed, for the purpose of approaching these arguments, that I am wrong not to regard Tactown as a share trader. If this approach involves an assumption that the partnership was a share trader, there is a difficulty in formulating a basis on which it should be so regarded. If I am driven to assign a basis, I think it must be the arrangements whereby the partnership acquired the unlisted shares and disposed of them within the framework of the partnership deed. For reasons I have given, the dealings in publicly-listed shares cannot seriously be considered as anything more than an exercise in make-believe. If the dealings in unlisted shares, on the terms of the deed, are assumed for argument's sake to amount to share trading, they remain to my mind comprehensively artificial and contrived, notwithstanding their assumed label. The question then seems to be whether or not a benefit from sec. 36A, 36, 28 and 51 of the Act is legitimately conferred by dealings of that kind and on that basis in the face of sec. 260. Has the partnership exercised a choice made available by the Act, or has it helped itself to an advantage in reliance on sec. 36A, 36, 28 and 51 that those sections cannot sustain when viewed along with sec. 260?
The High Court decisions of
F.C. of T. v. Gulland; Watson v. F.C. of T.; Pincus v. F.C. of T. (18 December 1985, reported at 85 ATC 4765) had not been delivered by the conclusion of argument on the present appeal. I have since had the benefit of them, and of short written submissions about them, from counsel on either side, as my formulation of the questions raised here might suggest. I refer in particular to the opinion of Dawson J. in Gulland's case [at 85 ATC p. 4794] that:
``... the problem is... one of reconciling sec. 260 with the rest of the Act and so is a problem of construction. It is a matter of construing the Act as a whole to determine where the incidence of tax was intended to fall. Only by this means might it be discovered whether or not a particular transaction falls within sec. 260.''
Later in the same judgment his Honour observed [at p. 4796] that:
``Section 260 is not explicitly directed at contrived arrangements or arrangements which are out of the ordinary, but the fact that an arrangement is of that nature is a circumstance which, when the purpose or effect of the arrangement is to do any of those things which are referred to in para. (a) to (d), may indicate that as a matter of construction the arrangement is one for the avoidance of tax to which sec. 260 is
ATC 4309
intended to apply. It may indicate that the choice or choices made by the taxpayer are not available by reason of the presence of sec. 260 in the Act, however much they may have been available in the absence of that section. It is in the end a matter of construction whether the section applies in a particular case.''
As will by now be evident, I regard the arrangements for the acquisition and disposal by Tactown of the unlisted shares as having had stamped on their face an indication that their sole purpose was to avoid tax; and a purported tax avoidance was their undoubted effect. Consistently with the decisions in the cases of Gulland, Watson and Pincus, I conclude that any application of sec. 36A, 36, 28 and 51 of the Act to the dealings by the partnership in the unlisted shares in irreconcilable with the existence and purpose of sec. 260. I cannot accept the submission that any of those provisions, properly construed, allows a taxpayer the opportunity to treat dealings dependent on these arrangements as though they give rise to deductible trading losses. The partnership was expressly designed, as counsel for the respondent put it, to acquire what were in effect shares ex dividend at a value deemed to be cum dividend. The requisite deeming relied on an impermissible use, amounting to an abuse, of sec. 36A and 36. These arrangements are, in my opinion, accordingly void as against the respondent and the partnership's claimed trading losses cannot be sustained. It follows that the appellant's claimed loss in his capacity of a member of the partnership was properly disallowed.
The appeal is dismissed with costs.
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